FOMC Preview

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What’s in Today’s Report:

  • FOMC Meeting Preview
  • The S&P 500 Approaches Downside Target: Chart

Stock futures are modestly higher this morning as yesterday’s sharp declines are digested while bond yields pulled back from multi-year highs as focus remains on the Fed.

The 10s-2s spread inverted again overnight after GS and JPM changed their forecasts to reflect a 75 bp hike tomorrow which is in line with rate market expectations. This dynamic is a sharp change in expectations from just the end of last week and largely the reason for the carnage in equities yesterday.

Economic data was slightly better than feared overnight between the German ZEW Survey and the NFIB Small Business Optimism Index, but good data is being seen as hawkish in this aggressive policy environment.

Looking into today’s session, we will get another read on U.S. inflation via the PPI report (E: 0.8% m/m, 11.0% y/y) but the release is not likely to materially shift policy expectations at this point with the June FOMC Meeting getting underway this morning.

Bottom line, the latest declines in stocks have been due to a rapid repricing of Fed rate hike expectations, from 50 basis points as recently as last week to 75 basis points as of yesterday and whether stocks can stabilize here will likely depend on how the bond market (namely Fed Funds futures) trade today and through the conclusion of the Fed meeting tomorrow. New highs in yields and another yield curve inversion will weigh on stocks while stabilization in rates could lead to some degree of a relief rally.

Three Keys to a Bottom Updated (Not Good)

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What’s in Today’s Report:

  • Three Keys to a Bottom Updated (Not Good)
  • Weekly Market Preview: All About the Fed
  • Weekly Economic Cheat Sheet: Survey Data in Focus

Global stocks are trading sharply lower and bond yields rose to new multi-year highs overnight amid fears that the Fed is getting more aggressive into an economic slowdown.

In the wake of Friday’s hot CPI report, rate markets are now pricing in a 75 basis point hike by the Fed in the next three months which saw the 10s-2s spread invert overnight underscoring renewed and growing recession worries.

Looking into today’s session, there are no notable economic reports, and no Fed officials are scheduled to speak.

There are two Treasury Bill auctions at 11:30 a.m. ET (3-Month Bills and 6-Month Bills). And while they are typically lesser followed, the results could shed light on market expectations of Fed policy in the coming months and if we see rates continue to surge higher, especially those with shorter duration, then concerns about a more aggressive stance by the Fed will likely keep pressure on risk assets today.

Why Stocks Dropped Yesterday

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What’s in Today’s Report:

  • Why Stocks Dropped Yesterday
  • ECB Takeaways and Why Fragmentation Matters to Markets

Futures are slightly lower as markets look ahead to today’s latest read on inflation via the CPI report while news from China was again mixed.

Negatively, Shanghai residents will undergo mandatory COVID testing this weekend (another potential setback to fully reopening).

Positively, Chinese CPI came in under expectations, rising 2.1% yoy vs. (E) 2.3% yoy, allowing for more stimulus.

Today focus is on CPI and expectations are as follows: 0.7% m/m, 8.2% y/y; Core: 0.5% m/m, 5.9% y/y.  Given yesterday’s late declines, unless we see an outright increase in CPI from April, I don’t think a firm CPI number should cause much more selling, while a slightly underwhelming CPI could prompt a solid rebound.  The other notable report today is Consumer Sentiment (E: 58.5) and we’ll look for five-year inflation expectations to stay below 3.0%.

Tom Essaye Quoted in S&P Global on June 9, 2022

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Manufacturing momentum drags as interest rates rise, supply chains snag

This is exactly what the Fed wants, The question is how quickly do we lose momentum and a slowing of growth becomes an outright contraction…said Tom Essaye, president of Sevens Report Research, of the slower momentum in manufacturing. Click here to read the full article.

The State of Inflation (CPI Preview and Inflation Expectations Update)

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What’s in Today’s Report:

  • The State of Inflation:  CPI Preview and Inflation Expectations Update
  • EIA Data and Oil Market Analysis (How High Can The Rally Go?)

Futures are modestly higher as markets bounce back from Wednesday’s declines following mixed news from China.

Positively, Chinese authorities may allow ANT Group to IPO, which is another sign China is easing pressure on tech companies. Additionally, Chinese exports handily beat estimates (16.9% vs. (E) 8.0%).

Negatively, Shanghai and Beijing reimposed some COVID restrictions, showing “Zero COVID” remains in effect.

Today focus will be on the ECB Rate Decision, and while no rate hike is expected, President Lagarde is expected to hint that a rate hike is coming in July and another rate hike is coming later this year (if it’s more hawkish than that, that will be a headwind on global stocks).  We also get Jobless Claims (E: 210K) but that shouldn’t move markets.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels Chart: S&P 500

U.S. futures are tracking European shares lower this morning amid hawkish money flows ahead of tomorrow’s ECB meeting announcement.

Economically, Eurozone Q1 GDP was revised up to 0.6% vs. (E) 0.3%, bolstering bets that the ECB could raise rates by 50 bp in July which is driving bond yields higher and pressuring equities this morning.

There are no notable economic reports and no Fed officials are scheduled to speak today but there is a 10-Yr Treasury Note auction at 1:00 p.m. ET.

Bottom line, investors remain focused on high inflation and uncertain economic growth right now and if we see rates begin to meaningfully move higher again today, especially in the wake of the 10-year auction, then the S&P 500 test and potentially break down through key near term support at 4,080 today.

Tom Essaye Quoted in Barron’s on June 6, 2022

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The Dow Ends Higher — and What Else Is Happening in the Stock Market Today

We need to see more proof those Keys to the Bottom are becoming more likely for stocks to move materially higher from here…wrote Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

Tom Essaye Quoted in CNBC on June 6, 2022

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Nasdaq rises slightly to start week, shaking off jump in bond yields

Since those lows near 3,800 in the S&P 500 there has been real progress: China is reopening and hopefully the economy will be close to operating at near-full capacity within a month. That will add a large tail-wind to the global economy, and perhaps most importantly, ease supply chain stress…Tom Essaye of the Sevens Report said in a note. Click here to read the full article. 

 

Market Multiple Table: June Update

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What’s in Today’s Report:

  • Market Multiple Table – June Update

Stock futures are modestly lower this morning as bond yields continued to rise overnight thanks to a more hawkish than expected central bank decision.

The RBA raised rates by 50 bps vs. (E) 40 bps overnight citing elevated inflation pressures which have rekindled fears about more aggressive monetary policy globally.

Meanwhile, economic data was soft as German Manufacturers Orders fell -2.7% vs. (E) 0.5% which underscores the recent loss of momentum in economic growth.

Looking into today’s session, there is just one economic report: International Trade in Goods (E: -$90.2B) which is not likely to materially move markets while no Fed officials are scheduled to speak.

That will leave investors focused on the latest move higher in yields as that was the main reason for the steady fade in stocks yesterday. To that point, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET that could move the bond market, and for stocks to move higher today, we will need to see yields level out.

Tom Essaye Quoted in Courthouse News Service on June 3, 2022

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Markets dip slightly on conflicting jobs report data

Tom Essaye of the Sevens Report noted that “very strong data would incur more Fed hawkishness while really soft data would spike stagflation concerns — and ‘moderating’ was just what we got from the ADP jobs report.” Click here to read the full article.