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MARKETS

Monday saw stocks continue their advance, buoyed by Wall Street's optimism from the previous session. This optimism was fueled by traders' heightened expectations of Federal Reserve rate cuts. Chair Powell's dovish stance post-FOMC injected fresh life into the rate cut narrative. As market participants digested the news that rate hikes were off the table for now, both interest rates and the stock markets began to appear more attractively priced.

Interestingly, the dynamic of "bad news is good news" seems to be at play again. Bloomberg’s U.S. economic surprise index has been slightly negative for over a month, indicating that economic data releases are consistently falling short of analyst forecasts. This trend is reminiscent of the situation in the first half of 2023 when GDP growth was hovering around a more subdued annualized pace of 2.0%.

The fact that disappointing economic data is now being interpreted positively by the market suggests that investors are anticipating a more accommodative monetary policy stance from the Fed. This perception is likely driving the optimism in both interest rate expectations and stock market performance.

The response of global markets to signs of a weakening U.S. job market also bolstered expectations of Federal Reserve rate cuts in the coming months, which has been a significant driver for stock market sentiment.

Additionally, US government bond yields have now dipped below the crucial 4.50% mark in the 10-year maturity, with European bonds following suit. The reality is that 10-year yields are once again on the decline, and within the contemporary playbook for stock market operators, this development is greeted as excellent news on various fronts.

The absence of significant fundamental inputs in the coming days might see market bears in hibernation allowing bulls to run free. Although there are several Fed speakers scheduled to address the public, they are likely comfortable with the moderate adjustment in rate-cut expectations.

If the January scenario, marked by half a dozen cuts, appeared overly dovish, then the singular rate cut priced before the May FOMC meeting might be perceived as far too hawkish. Between April 26 and May 3, traders reinstated roughly 14 basis points of rate-cut anticipation into the curve, aligning with a 15 basis points increase in twos.

The inclination toward two rate cuts in 2024, rather than just one, seems to strike a prudent balance, particularly in light of emerging signs indicating a labour market slowdown—assuming that a single instance of NFP underperformance carries weight through to the next month's run of economic data.

FOREX MARKETS

The US dollar, not unexpectedly continues to consolidate ahead of next week's US inflation data although with US rates falling much of the zeal is coming off from the US dollar lustre.

The underperformance of the Yuan today comes as a surprise, especially after China took steps to counter excessive currency weakness announcing plans for more supportive macro policies aimed at bolstering growth.

But USDJPY moved higher as traders viewed the current intervention run to have temporarily subsided, likely causing Yuan traders to look over their shoulders at Yen's weakness.

As we turn the page on a somewhat troubling and perhaps misleading first quarter of inflation and labour market data, the recent non-farm payrolls report suggests that the economy is still following its path of rebalancing labour markets, moderating wage growth, and cooling inflation. And with survey data pointing to more job weaknesses to come, it might just be a case of the “ proof of economic weaknesses in the pudding” before the dollar heels.

OIL MARKETS

On Monday afternoon( US), it was reported that Hamas, a terrorist group, had accepted the terms proposed by Israel for a ceasefire. This move potentially avoided a huge offensive by Israel in the city of Rafah. Israel has identified Rafah as Hamas' final stronghold in Gaza and had earlier instructed the Palestinians in the city to evacuate. An Israeli offensive in Rafah could escalate tensions across the Middle East, with Houthi terrorists in southern Yemen possibly intensifying attacks on commercial shipping in the Red Sea, creating more supply disruptions. The situation is still evolving, but currently, the market is worried about a US economic slowdown, which could happen if the hard data fully catches up to the soft survey data.

Before the attack, the market had only built in a one-dollar premium, and it is still fretting about a potential economic slowdown.

RAMBLE

Too many” textbook” economists still adhere to the conventional belief that higher rates stifle economic growth.

Besides the fact that buying a home in the US is next to impossible, the terming-out phenomenon observed in 2020 and 2021 indeed had a significant impact on driving profitability to new heights, especially in the context of the post-pandemic US economy. The convergence of declining interest expenses and increasing revenue, fueled by a surge in pricing power, contributed to this trend.

As corporations took advantage of historically low borrowing rates and enjoyed robust profits, they were able to accumulate substantial cash reserves. Similarly, households benefited from increased cash flow due to spikes in the saving rate, government stimulus payments, and rising wage growth.

However, it's important to note that these benefits were not equally distributed across all segments of society. Low-income households saw their cash reserves depleted over time, and smaller or lower-rated corporations faced challenges accessing capital markets or securing favourable borrowing conditions compared to larger firms.

Despite these disparities, the overall economic landscape provided fertile ground for the Federal Reserve to stimulate economic activity through measures such as rate hikes. The accumulation of cash reserves and the overall robustness of the economy created an environment where adjustments to monetary policy could be made to support continued growth and stability, albeit with consideration for the uneven distribution of benefits.

As cash rates began to rise, yields on money market funds and corporate cash reserves followed suit, presenting an increasingly appealing opportunity. On one side, there were very low fixed-rate payments (such as mortgages at 3.3% for households and corporate bonds with sub-4% coupons). On the other side, yields on riskless cash balances continued to climb.

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