Indices flat on quiet news day, Regional Banks bounce back

Indices flat on quiet news day, Regional Banks bounce back

Wall Street was flat calm today after last weeks’ Fed and Payroll news. US Consumer Price Indices (CPI) and Producer Price Indices (PPI), due on Wednesday and Thursday respectively, will give read outs on inflation in April. This is perhaps the major source of market risk this week, and in that light US Consumer’s inflation expectations published today are more interesting than usual.

Consumer Inflation Expectations

The New York Fed’s Consumer Inflation Expectations for the US declined to 4.4% for the year-ahead horizon in April, down from the 4.7% seen in March and coming in slightly below forecasts of 4.5%. The April decline was driven in part by expectations for an easing of in the cost of a college education and food, unchanged expectations for the cost of medical care and rents, and expectations that gas prices would rise at a slightly faster rate.

This inflation outlook is sharply down from peak inflation expectations of 6.8% in Jun 2022. The longer-term inflation outlooks worsened slightly, with US consumers now expecting three-year inflation of 2.9% and five-year inflation of 2.6%. However, if achieved, this inflation outcome would undoubtedly be welcomed by the Fed.  

Markets Flat

• At the time of writing, the broad S&P 500 and tech heavy NASDAQ were flat, while the Russell 2000 indices was off by 0.6%
• Regional bank stocks started the week on a positive note, led by strength in PacWest Bancorp (which some saw as the next bank failure) – PacWest gave some reassuring comments and cut dividends to conserve cash
• The VIX, Wall Street’s fear index, edged up to 17.5
• The dollar index was flat at 101.0, as were key rates like the Euro/Dollar and Dollar/Sterling
• Yields on 2- and 10-year Treasuries rose modestly to 3.94% and 3.49%, respectively

Gold holds above 2K mark, oil rallies

• Gold prices maintained their 2K level, up 0.5% to $2,036 per ounce
• Crude oil prices were today’s standout asset, up by 2.4% to $73.0 per barrel
• Grain and oilseed markets were also flat to mixed.

  US Consumer Credit Rises

  • Europe's largest economy showed unexpected weakness, with German industrial production in March falling 3.4% month-on-month, a sharper decline that the expected 1.3% decline.
    This reversal followed strong gains in January and February, and marks the largest drop since early 2022
  • Germany's coveted automotive industry accounted for much of the weakness in manufacturing, with motor vehicles and parts falling 6.5% in March after significant gains the month prior
  • Construction, machinery and equipment manufacturing, and the production of capital goods all saw declines in March

  
  

  German industry sees slowdown, European recession?

• Europe's largest economy showed unexpected weakness, with German industrial production in March falling 3.4% month-on-month, a sharper decline that the expected 1.3% decline.
• This reversal followed strong gains in January and February, and marks the largest drop since early 2022
• Germany's coveted automotive industry accounted for much of the weakness in manufacturing, with motor vehicles and parts falling 6.5% in March after significant gains the month prior
• Construction, machinery and equipment manufacturing, and the production of capital goods all saw declines in March
• European recession is still on the cards, as Germany's economy narrowly avoided a technical recession – Q1 GDP remaining unchanged from the quarter prior after contracting 0.5% in Q4.
• Concerns are shared elsewhere in Europe. Sentix's Euro Zone Investor Confidence Index unexpectedly plunging to -13.1 in May versus expectations of a climb to -8
• This was the worst sentiment seen since September as European's outlooks continue to sour in the face of rising rates by the ECB
• US consumer credit rose more than expected in March, with Friday's reading showing an increase of $26.51 billion, well above market expectations of a $16.8 billion jump, and marking the largest increase seen since November
• While consumer spending and demand are showing resilience, consumers seem to be shying away from purchasing big ticket items
• March's increase was largely driven by a 17.3% increase in revolving credit, like credit cards, the largest such increase since March 2022
• At the same time, nonrevolving credit, like auto and other big ticket item loans, slowed to an increase of only 3%

China/US Talks aimed at smoothing tensions

• Chinese diplomats met their American counterparts in Beijing on Monday to discuss the recent challenges between the two sides and place an emphasis on stabilizing ties
• US Ambassador to China Nicholas Burns met with China's Foreign Minister Qin Gang, with Gang saying China's top priority is to "stabilize Sino-US relations" in order to "prevent any accidents between China and the US"
• Gang's comment potentially impacts commodity markets, with China being the top destination for US ag exports, and recent tensions has led to volatility in commodity prices

Russia steps up Ukraine attacks

• Russia started the week off with their largest wave of drone attacks on Ukraine in months on the eve of their coveted Victory Day holiday tomorrow
• Russian strikes also continue to target Black Sea port cities. Ukraine's top agricultural port city of Odesa was hit again, setting fire to a storage facility and reportedly injuring multiple employees
• With the renewal deadline for the Black Sea export corridor now only 10 days away, concern of Ukrainian grain being largely cut off from the global market again continue to grow, though they have been able to make last minute deals previously

 

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com