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Updated Fed Preview (75 bp Hike Today)

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What’s in Today’s Report:

  • Updated FOMC Preview – The Fed Will Hike 75 bp Today (And That May Not Be Bad for Markets)
  • A Look at the TIPS Market Reveals Increased Confidence in the Fed

Futures are modestly higher as bond yields and the dollar pulls back ahead of the Fed and an emergency ECB meeting that will address fragmentation and the bank’s bond-buying programs sparking risk-on money flows this morning.

Economically, Chinese Fixed Asset Investment, Industrial Output, and Retail Sales were all better than feared overnight which is easing concerns about the health of global growth trends.

Looking into today’s session, there is a slew of economic data due out in the U.S. including: Retail Sales (E: 0.1%), Empire State Manufacturing Index (E: 5.5), Import & Export Prices (E: 1.2%, 1.3%), and the Housing Market Index (68). At this point, the Fed is expected to hike aggressively in the months ahead to tame inflation regardless of the state of economic growth, so the stronger the data, the better for risk assets.

After the flurry of data in the morning, the market focus will shift to the Fed with the FOMC Announcement at 2:00 p.m. ET and the Fed Chair Press Conference 2:30 p.m. ET. As discussed in more detail in today’s report, a 75 basis point hike may not cause further losses in equities as long as investors gain confidence in the Fed’s ability to get inflation under control. That will be the key to how stocks and other markets react to today’s decision.

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.

Tom Essaye Quoted in CNBC on June 2, 2022

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Dow falls 300 points, Nasdaq drops 2%, as major indexes notch weekly losses

Numbers this strong would likely reverse any hopes the Fed would consider a pause in rate hikes after the June/July increases, because it would signal the labor market remains very tight…Tom Essaye of the Sevens Report said. Click here to read the full article.

Jobs Day

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What’s in Today’s Report:

  • Jobs Day
  • Why the ADP Report Helped Stocks Rally

Futures are slightly lower following a generally quiet night of news as markets look ahead to today’s jobs report.

Economic data from Europe underwhelmed as Euro Zone Services PMI declined to 56.1 vs. (E) 56.3 while Euro-Zone Retail Sales missed estimates, falling –1.3% vs. (E) 0.4%.

Elon Musk made cautious comments saying he had a “super bad” feeling about the economy in a Reuters interview.

Today’s focus will be on the Jobs Report and expectations are as follows: Job Adds (E: 325k), UE Rate (E: 3.5%), Wages (E: 0.4% m/m & 5.3% y/y).  As long as data shows “moderation” in the labor market (so a positive number but in the lower part of the range) then stocks can extend Thursday’s rally.  Other data today includes  ISM Services PMI: 56.3, and we get one Fed speaker:  Brainard (10:30 a.m. ET).

Three Keys to a Bottom Update

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What’s in Today’s Report:

  • Three Keys to a Bottom: Update
  • Weekly Economic Cheat Sheet: Are Growth and Inflation Both Peaking?
  • Weekly Market Preview: Jobs Data in Focus

Stock futures are moderately lower this morning, tracking losses in EU shares amid renewed inflation concerns.

German CPI jumped to 7.9% vs. (E) 7.5% and the Eurozone HICP Flash rose to 8.1% vs. (E) 7.7% in May. Additionally, the EU agreed to a partial ban on Russian energy imports which has sent oil to multi-month highs, compounding inflation fears this morning.

Looking into today’s session, there are three economic reports due to be released: Case-Shiller Home Price Index (E: 2.2%), FHFA HPI (E: 1.9%), and Consumer Confidence (E: 104.0). Investors will want to see the latter report at least meet estimates as the health of the U.S. consumer has become less certain in the face of lofty inflation pressures.

Finally, there are no Fed officials speaking today but Powell is set to meet with Biden at the White House at 1:15 p.m. ET. And following Waller’s more hawkish comments about suggesting 50 bp hikes until inflation is back at 2% from yesterday, any insight to the Fed’s policy plans after the summer rate hikes, which are solidly priced in, will move markets (more aggressive policy expectations could hit stocks today).

Sector Trends: Relative Strength to the S&P 500

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What’s in Today’s Report:

  • Sector Trends:  Relative Strength to the S&P 500
  • EIA Analysis and Oil Market Update

Futures are slightly higher as incrementally positive macro news offset more disappointing tech earnings.

Nvidia earnings underwhelmed and the stock fell 5% after hours, and that is weighing on tech this morning.

But, not as hawkish as feared in FOMC minutes and the continued reopening of Shanghai offset the soft NVDA earnings.

Today’s focus will be on economic data via the Revised Q1 GDP (-1.4%), Jobless Claims (E: 208K), and Pending Home Sales (E: -1.3%).  Given the recent weakness in other economic data, the market will want to see stability in the numbers to continue to push back on stagflation concerns.

Market Multiple Levels Chart

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What’s in Today’s Report:

  • Market Multiple Levels: S&P 500 Chart
  • Quick CPI Preview

There is a tentative sense of relief in markets this morning with stock futures tracking global equities higher while bond yields and the dollar pullback ahead of key inflation data in the U.S. today.

Economically, Chinese CPI and PPI were both hotter-than-expected however German CPI met estimates of 7.4% y/y which is giving investors hope that price pressures are still high but in the process of peaking.

Looking into today’s session investors will be primarily focused on the CPI report (E: 0.2% m/m, 8.1% y/y), and more specifically the Core CPI figures (E: 0.4% m/m, 6.0% y/y).

We will also hear from one Fed speaker: Bostic (12:00 p.m. ET), and there is a 10-Yr Treasury Note auction at 1:00 p.m. ET.

Bottom line, if today’s inflation data comes in below expectations, it will likely bolster this morning’s already solid gains in stock futures and lead to a further relief rally. Conversely, if inflation runs hot, expect more volatility across asset classes and the potential for new lows in the major equity indices.

Tom Essaye Quoted in Barron’s on May 5th, 2022

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The Dow Lost More Than 1,000 Points as Wednesday Gain Vanishes

China’s PMI this morning was horrific, that underscores that the Chinese economy is a huge drag on global growth right now. It’s a risk to keep inflation high…said Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

Tom Essaye Quoted in The Madison Leader Gazette on May 5, 2022

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Stock Market Today: Dow Slides, Shopify Tumbles, NIO Slumps

We shouldn’t have gone up 2% yesterday on the news…said Tom Essaye, founder of Sevens Report Research. Click here to read the full article.

Update on the Three Headwinds on Stocks

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What’s in Today’s Report:

  • Update on the Three Headwinds on Stocks
  • Weekly Market Preview:  Is Inflation Finally Peaking?
  • Weekly Economic Cheat Sheet:  All About Inflation (CPI Wednesday)

Futures are sharply lower following new COVID lockdowns in China.

COVID cases in Shanghai are rising again, prompting new restrictions on movement and work.  Meanwhile, Beijing continues to suffer from limited lockdowns and this is compounding worries about global economic growth.

Geo-politically, Victory Day in Russia offered no notable news and there remains no end in sight to the Ukraine war.

Today there are no economic reports and just one Fed speaker, Bostic at 8:45 a.m. ET.  So, we should expect technicals to dominate trading and if last week’s intra-day lows are broken in the S&P 500 and we don’t get any positive news on 1) Fed hawkishness, 2) Chinese lockdowns or 3) Russia/Ukraine, we should not be shocked if the S&P 500 move closer to a test of support at 4,000.