NASDAQ and US Dollar rally, Gold and Oil dip

The NASDAQ 100 and Dow Jones moved higher this morning as optimism grew that a Debt Ceiling agreement will be reached, and despite a growing number of people on Wall Street thinking that the Federal Reserve may have more rate hikes in store for the US economy. The VIX, Wall Street’s fear index, fell back to recent lows, reinforcing the calm mood.

TODAY’S MAJOR STORIES

Tighter jobs market, weaker Philly Fed survey

Today’s unemployment claims suggests a tightening of the jobs market again in May, the opposite direction required for for easing wage inflation. A negative Philadelphia Fed manufacturing index for May still indicate contraction from the previous month, but the pace of the contraction is slowing. Recent US economic data continues to suggest that the economy’s slowdown is moderating and inflation pressures remain.

More rate hikes being baked in?

The US Dollar rallied on expectations that the Fed will boost its benchmark interest rate another 25 basis points on June 14. Futures market expectations that that move jumped to 45% this morning, up from 28% yesterday and up from just 11% a week ago. The market was pricing in three rate cuts a week ago to 4.25%, but now those December rate expectations are rising to 4.5%, or even possibly 4.75%.

There’s a growing acknowledgement on Wall Street that the Federal Reserve may not be done with rate hikes, and traders are also dialing down their expectations of rate cuts later this year. In other words, they’re starting to believe the Fed’s consistently skeptical line: no early rate cuts, and the possibility of more rate hikes.

Tech sector rally, despite rate rises

The tech-heavy NASDAQ 100 was hurt most by rising interest rates in recent months, but this morning it rose to its highest level since late August in trade yesterday. This contradiction can be explained by Wall Street coming to grips with intertest rate reality, climbing the ‘wall of worry’, and not being as afraid of it higher rates as it once was.

Bottom line – risk-on?

Equities look poised for more risk-on days and bullish price action. The US Dollar could also gain, but Gold losing its market hedge status and Oil slipping on recession and demand fears.

TODAY’S MAJOR MARKETS

Equity markets

• NASDAQ 100 was up 0.8% this morning to 12,602, with mega-caps and chip-makers leading
• Dow Jones slipped 0.4% to 33,277, with Walmart rising just 0.6% after an initial bounce on lackluster sales growth and warnings over the impact of grocery price inflation on consumer spending
• S&P 500 rose 0.2% to 4,167, still maintaining a bullish trend
• In focus KBW Regional Bank Index, fell 0.9% after a major rally yesterday
• FTSE 100 was up 0.3% at 7,742
• DAX index rose 1.3% to 16,163
• The VIX, Wall Street’s fear index, fell 1.3% to 16.65, closing on year-to-date lows

Currencies and Bonds

• The dollar index rose 0.7% to 103.4, continuing recent strength
• Euro/Dollar and Dollar/Sterling both fell 0.7% today, continuing recent weakness
• Yields on 2- and 10-year Treasuries again rose modestly to 4.23% and 3.64%, with recent rises reflecting Debt Ceiling and inflation fears, and making the US Dollar look more attractive

Commodities

• Gold prices fell by 1.4% to $1,957per ounce, down from early May’s $2,050 high when traders favored its hedging potential
• Crude oil prices fell 1.4% to $71.8 per barrel, down from early April’s $83 high when OPEC+ supply constraints worried traders
• The grain and oilseed complex were mixed, with the hard wheat markets firmer on weather worries, while corn and soybean prices continued to post double-digit losses

TODAY’S ECONOMIC NEWS

Jobless claims slip back

• First-time claims for unemployment benefits fell to 242,00 in the week ending May 13, below an expected 255,000 and down from 264,00 the previous week
• The four-week moving average slipped to 244,250 claims, down from 245,250 the previous week
• Continuing claims for the week ending May 6 dropped by 8,000 to 1.799 million
• The four-week moving average for continuing claims fell by 15,500 to 1.812 million.

Philly Fed Survey less gloomy

• The Philadelphia Fed manufacturing index for May improved to a -10.4, better than analyst expectations of -20. And up from -31.3 the previous month
• The survey’s indices for general activity, new orders and shipments rose this month, although they also remain negative
• Surveyed firms reported a decline in employment, with prices declining further as well, reflecting muted expectations for growth over the next six months

China attempted Ukraine peace initiative unlikely to succeed

• China’s special envoy met Ukraine’s foreign minister yesterday – Ukraine repeated that it will not accept any peace proposal that involves the loss of its territories, including Crimea
• Ukraine demands the immediate withdrawal of all Russian troops from these territories as a precondition for any potential negotiations, a non-starter with Russia
• China’s envoy now travels to Europe to meet with select leaders, before ending this trip in Moscow
• European leaders remain solidly behind Zelensky’s plan as a working framework for a political solution to the war
• There’s little hope at this point that China will be successful at working out a peace plan

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com