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MARKETS

With bond yields lighting up like a fireworks display, stock markets took a nosedive on Wednesday, turning what could have been a victorious month into a stumble for the big three indexes. Indeed, stocks are getting a good old-fashioned spanking after a lacklustre bond auction. The hawkish chatter from the Fed, especially the stern notes from Neel Kashkari, has put investors on edge, turning even the tiniest morsel of data into a monstrous market mover.

Just earlier this week, we were all set for a calm, almost relaxing PCE inflation print on Friday. But then, the sentiment winds did a complete 180. The hawkish parade of Fed speeches combined with the government bond auction's spectacular flop has turned what we hoped would be a pleasant picnic into a thunderstorm. It’s like someone brought a skunk to the garden party, and now everyone’s running for cover.

Multiple sparks were igniting the bond selloff. Earlier this week, Minnesota Federal Reserve President Neel Kashkari went on CNBC and practically said, "Hey folks, I need to see inflation hit the snooze button for several more months before I feel good about cutting rates." As if that wasn’t enough to shake things up, a better-than-expected consumer confidence reading on Tuesday crashed the party, flaunting an unwelcome rise in inflation expectations.

Adding to the drama, recent Treasury debt auctions have been, how should I say, lacklustre. The latest debacle was a $44 billion auction of seven-year notes on Wednesday, which sold at a yield of 4.650%—higher than the market rate at the time. Clearly, investors weren’t exactly lining up around the block.

The cumulative effect? Benchmark 10-year Treasury yields settled at 4.623% on Wednesday, marking a 0.152 percentage point rise over the last two days. It's not exactly the kind of news stocks were hoping for.

In response, the Dow Jones Industrial Average took a nosedive, shedding 411 points, or 1.1%, on Wednesday. The S&P 500 and the Nasdaq didn't fare much better, slipping 0.7% and 0.6%, respectively.

But hey, it wasn't all doom and gloom. Nvidia (NVDA) managed to dodge the falling bricks, closing up 0.8%. So, at least there's a silver lining in this stormy market sky!

Thursday isn’t giving markets a break either, with the second preliminary estimate for first-quarter U.S. GDP growth on the docket.

Fitch Ratings chimed in on Tuesday, painting a rather gloomy picture. They expect U.S. GDP growth to hit the brakes later this year, blaming it on falling household income and declining consumer spending. The GDP growth clocked in at an annualized rate of 1.6% in Q1 2024, a sharp slowdown from the brisk 3.3% pace in Q4. The culprits? Weak net exports, lower inventory build-up, and weaker government spending.

"We expect growth to slow to a significantly below-trend rate later this year," Fitch warned, pointing to a fading fiscal impulse, slowing household income growth, a weakening contribution from net trade, and the lagged effects of last year’s monetary tightening. It’s like getting hit with every bad weather report at once.

Still, they noted, "The strength of the U.S. consumer has underpinned the resilience of the U.S. economy." So, while the economic ride might get bumpy, the trusty U.S. consumer is still hanging in there, keeping the wheels from completely falling off.

And if that’s not enough, Friday brings the U.S. Personal Consumption Expenditures Price Index report for April, the Federal Reserve's favourite inflation gauge. Looks like investors are in for a rollercoaster ride to end the week!

Just beware! The macro narrative is as fickle as the weather. One moment it's all sunshine and rainbows, and the next, you're caught in a downpour without an umbrella. So, keep your wits about you and your forecasting skills sharp, because in this game, predicting the future is like trying to predict whether it'll rain on your picnic—tricky business indeed!

OIL MARKETS

A risk-off sentiment prevailed across markets, dampening sentiment in the commodity sector. This was exacerbated by a stronger USD, which diminished investor appetite.

The risk-off tone exerted downward pressure on crude oil prices, with both Brent and WTI experiencing declines of more than 1% during the session. These drops eroded gains made earlier in the week, driven by renewed geopolitical tensions. The death of an Egyptian soldier in a clash with Israeli forces advancing into the Gazan city of Rafah, along with renewed attacks by Houthi militants on ships in the Red Sea, added to the atmosphere of uncertainty.

Investors are expected to remain cautious as they await the OPEC meeting scheduled for this Sunday. The producer group faces a challenging demand outlook, particularly with Asian nations scaling back purchases from major oil exporters like Saudi Arabia and Russia due to soft demand. However, potential growth in developed markets may help offset some of these concerns.

Initial data indicate a relatively high number of US holiday trips taken over the Memorial Day holiday, signaling the traditional start of the driving season. This could provide some support to oil demand, although market participants remain vigilant amid ongoing geopolitical tensions and uncertainties surrounding global economic recovery.

Last week, the American Automobile Association (AAA) anticipated a groundbreaking 38.4 million individuals would embark on journeys exceeding 50 miles by car over the Memorial Day weekend. This figure represents a 4% increase from the previous year and a notable 1.9% surge compared to the pre-COVID Memorial Day weekend in 2019. Factoring in all modes of transportation, AAA projected nearly 43.8 million holiday travelers, approaching record levels.

This optimistic outlook was corroborated by recent data from the Energy Information Administration (EIA), released last Wednesday. The data indicated a robust surge in gasoline supplied to the domestic market, reaching an eight-month high of 9.315 million barrels per day (bpd) during the week ending May 17. This marked an impressive uptick of 440,000 bpd, or 5%, week-on-week. It's worth noting that product supplied tends to escalate ahead of consumer demand peaks as suppliers strategically position products closer to demand centers.

Looking ahead, the next weekly EIA report is slated for Thursday release, postponed by a day due to Memorial Day. This forthcoming report will provide further insights into whether the trend of increased gasoline supply persists, reflecting the heightened activity observed over the holiday weekend.

FOREX MARKETS

As major currencies hit the skids and break bad on key levels (like EURUSD at 1.08 and GBPUSD at 1.27) it could stir up a bit of a fuss, causing a slight unwind of recently minted yen funded carry trade positions, potentially benefiting the yen. As a result, USDJPY is retreating from overnight highs of around 157.70.

But hold onto your hats! USDJPY isn't ready to call it quits just yet and is likely to stay buoyed by high US yields. So, unless the US economic data decides to throw in the towel and the Fed hits the snooze button on their "higher for longer" playlist, USDJPY may keep strutting its stuff today.

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