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What the BOC Rate Hike Means for U.S. Interest Rates

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What’s in Today’s Report:

  • What the BOC Rate Hike Means for U.S. Interest Rates

Futures are little changed despite more economic stimulus from China.

The Chinese government cut bank deposit rates and encouraged lending to boost auto sales in the latest effort to stimulate the economy, although the moves were already expected so this isn’t a new, positive surprise.

Economic data was sparse overnight with Japanese and EU GDPs the only notable releases, and neither number moved markets.

Today the only notable economic report is Jobless Claims (E: 235K) and markets will want to see stability in the data (so no sudden jump higher), but more broadly markets remain in a temporary “holding pattern” with the CPI report and Fed decision now both looming less than a week away.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels: S&P 500 Chart (Unbranded PDF Available)
  • Why Did Small Caps Surge?

Stock futures are little changed in premarket trade indicating this week’s digestive churn sideways could continue today following mixed economic data overnight.

Chinese exports dropped -7.5% vs. (E) +1.0% year-over-year in May adding to worries about the health of the recovery in the world’s second largest economy.

Conversely, in Europe, German Industrial Production jumped 1.8% vs. (E) 1.4% y/y helping ease some worries about the health of the EU economy.

Looking into today’s session, the list of potential catalysts remains light as there are just two economic reports to watch: International Trade in Goods and Services (E: -$76.0B) and Consumer Credit (E: $21.0B) while there are no Fed officials scheduled to speak.

That will leave focus on market internals and whether or not the early June money flows into cyclicals and small cap stocks can continue. If so, the improving breadth in the market with the S&P 500 sitting just under YTD highs will add to the case that the 2023 rally is sustainable.

Tom Essaye Quoted in Yahoo Finance on May 31st, 2023

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Stock Rally Loses Steam After AI-Fueled Euphoria: Markets Wrap

Yes, AI does have great potential and it does appear to be the ‘next big thing’. But I don’t see how that promise can offset the reality of higher interest rates and more pressure on the economy, at least not for a sustainable period…wrote Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. Click here to read the full article.

Sevens Report Analyst Quoted in MarketWatch on May 31st, 2023

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U.S. oil futures settle at lowest since March

The potential fallout from the U.S. debt-ceiling debacle and rising odds of a June interest-rate hike both “weighed on oil as the former influence would be a broader riskoff market event, while the latter would further reduce already waning optimism for a soft economic landing this year,” analysts at Sevens Report Research wrote in Wednesday’s newsletter. Click here to read the full article.

 

Tom Essaye Quoted in Barron’s on May 31st, 2023

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Stocks Open Lower as Traders Fret About China Manufacturing, Debt Bill

“Republican Representatives have said this morning that they have the votes to pass it. If that comes to fruition, that should remove a headwind from risk assets and open the door to a continued move higher in equity markets,” writes Tom Essaye, the founder of Sevens Report Research. Click here to read the full article.

What Is Immaculate Disinflation, and Why Did It Cause Last Week’s Rally?

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What’s in Today’s Report:

  • What Is Immaculate Disinflation, and Why Did It Cause Last Week’s Rally?
  • Weekly Market Preview:  Does Economic Data Stay Resilient?
  • Weekly Economic Cheat Sheet:  Service Sector in Focus This Week

Futures are little changed as markets digest the Thursday/Friday rally amidst a mostly quiet weekend of news.

Oil prices are solidly higher (Brent crude up 1.7%) after Saudi Arabia announced a voluntary 1M bpd production cut for the next month, although that’s not seen as a sustainable bullish catalyst.

Economically, global service PMIs were mixed as the Euro Zone Service PMI missed expectations (55.1 vs. (E) 55.9) while the UK and Chinese service PMIs were in-line.

Today focus will be on the ISM Services Index (E: 52.0.) and specifically the price index in this report.  Last week, a sharp drop in the ISM Manufacturing PMI Prices Paid Index ignited the rally, and if we see a similar drop in the services price index, it’ll help extend the rally as markets will get more confident disinflation is accelerating.

What Drove Yesterday’s Rally? (It Wasn’t AI)

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What’s in Today’s Report:

  • What Drove Yesterday’s Rally? (It Wasn’t AI)

Futures are higher and global markets rallied overnight on rising hopes for a rapid decline in inflation.

Inflation metrics on Thursday hinted at accelerating disinflation (ISM Prices Paid and Unit Labor Costs were yesterday’s bullish catalysts) and that was reinforced this morning by a decline in Korean CPI.

Chinese stocks surged overnight thanks to a Bloomberg article that raised hopes for more government stimulus.

Today focus will be on the jobs report and estimates are as follows: 180K job adds, 3.5% Unemployment Rate and 0.3% m/m & 4.4% y/y wage gains.  Given yesterday’s momentum, if the jobs report shows solid job gains and underwhelming wage growth, the rally should continue.  However, if the jobs report comes in “Too Hot” on the headline or wages, don’t be surprised if markets give back part of yesterday’s rally.

Tom Essaye Quoted in Swissinfo.ch on May 30th, 2023

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“Yes, AI does have great potential and it does appear to be the ‘next big thing’,” wrote Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “But I don’t see how that promise can offset the reality of higher interest rates and more pressure on the economy, at least not for a sustainable period.” Click here to read the full article.

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Jobs Report Preview

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What’s in Today’s Report:

  • Jobs Report Preview

Futures are modestly higher after the House of Representatives passed the debt ceiling extension.

The House passed the debt ceiling extension 314-117, effectively ending this drama (passage in the Senate is all but guaranteed).

Economically, EU Core HICP (their core CPI) rose 5.3% vs. (E) 5.5%, hinting at the re-start of disinflation.

Today focus will be on economic data and there are numerous potentially important reports, starting with the ISM Manufacturing PMI (E: 47.0), where markets will want to see stability in the data (so not dramatically above or below the expectation).  On employment, we get two important reports via the ADP Employment Report (E: 160K) and Jobless Claims (E: 235K), and moderation in both reports (so a drop in ADP and rise in claims) will be welcomed by markets.  Finally, on inflation, Unit Labor Costs (E: 6.3%) will give us the latest insight into wages (the lower this number, the better).  Finally, there is also one Fed speaker: Harker (1:00 p.m. ET).

 

Four Debt Ceiling Deal Takeaways

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What’s in Today’s Report:

  • What the Debt Ceiling Deal Means for Markets (Four Takeaways)
  • Case-Shiller Home Price Index Comes in Hotter than Expected
  • Chart: Growth Breaks Out Over Value

Stock futures are modestly lower this morning as soft Composite PMI data in China overshadowed easing inflation numbers in Europe overnight while traders await a House vote on the new debt-limit bill.

China’s Composite PMI fell to 52.9 in May down from 54.4 in April which confirmed that the economic recovery in the world’s second largest economy is underwhelming investor expectations which were admittedly lofty coming into the year.

In Europe, French CPI dropped to 5.1% vs. (E) 5.7% y/y in May and PPI plunged to 7.0% vs. (E) 12.8% which is driving some less-hawkish money flows this morning, supporting a bid in global bond markets.

Looking into today’s session, there are two economic reports to watch: Chicago PMI (E: 47.0) and JOLTS (E: 9.35 million). Investors will want to see some moderation in the data but still not a sharp drop-off in either growth or employment as that would rekindle worries of a hard landing and weigh on risk assets.

There are also multiple Fed speakers including: Collins (8:50 a.m. ET, 12:20 p.m. ET), Harker (1:30 p.m. ET) and Jefferson (1:30 p.m. ET). And given the hawkish shift in Fed rate hike odds over the last few days, a more dovish leaning tone from any of the policy makers would be well received.

Finally, the House is set to vote on the debt limit bill today and Republican Representatives have said this morning that they have the votes to pass it. If that comes to fruition, that should remove a headwind from risk assets and open the door to a continued move higher in equity markets.