Slip sliding away.

Following yesterday’s comments from Powell, markets have continued to underperform. Its as if the markets got their thoughts wrong regarding Powell’s comments earlier in the year. The markets’ reaction yesterday and most likely today probably show that they were wrong in advance of the FOMC meeting.  The markets were looking for a sugar hit from the commentary and no sugar was forthcoming. Yesterday, the sell-off came after Powell’s comments and today, we got more of the same.

Shares fell on the day.  To date, the S&P 500 index is up 16% and coming to May, which traditionally is a sell month. The recent run has allowed traders to pause and think about valuations and probably take some profits. There were some movements in shares with the energy sector falling 1.71% as U.S. oil prices fell some 2% on oversupply fears.

The Dow also fell with Dow falling 6.1% after it reported a fall in core earnings (spun out of DowDuPont). Kellogg fell 3.4% after it reported a fall in earnings and announced that the CFO would be replaced.  Volumes on the exchanges remain strong with 7.31bio shares trading versus the 20-day moving average of 6.61 bio.

Stocks need a catalyst to move higher and that will probably be in the form of a trade deal between the U.S. and China. The betting on a rate cut now seems to be in 2020, and 2019 appears to be largely forgotten.

Bonds also entered the sell-off zone today. Interest rate traders cut their bets on the CME and are now pricing a 50% chance of a rate cut by December, down from 64% early Wednesday prior to the Fed rate announcement. Traders will be watching the jobs numbers Friday.

High yield issuance in April was strong. European high-yield issuance was up 134% in April compared to March. Euro 14.5 bio has been sold to date and is down 51% on the first four months of 2018.

In the U.S. investment-grade corporate funds continue to enjoy inflows. Some $374.5 mio in net cash was attracted, the 14th consecutive week of inflows. Over the week, some $16 bio of cash went into money-market funds up from the previous week of $4.26 bio. (Refinitiv)  Equity funds lost $5.5 bio over the week ending Wednesday. (Lipper)

The Rant

What happens Friday with respect to the U.S. jobs report will have an impact on markets. How profound, it’s hard to say but inflation won’t be a casualty.

Wages will probably increase slightly, and companies will add an expected 190,000 to 200,000 workers. Unemployment will probably remain in the range of 3.7% to 3.8%. Economic growth appears to have accelerated yet inflation has weakened. And that’s probably the nub of the thinking in the FOMC.  Without a breakout in inflation, the Fed appears to be sitting on its hands and won’t decide otherwise until it has a reason.

Even the market has revised its view on inflation. The markets appear to be happy with the current reasoning. Trump, however, would like to see rates cut to boost the economy. Economists say this would lead to a crash landing for the economy. A big number Friday or an increase in hourly earnings could move the dial. On a positive note, productivity has been slowly rising and this could feed into wages. Although with less being spent on capex, and with increasing dividends and share buybacks, increasing wages probably won’t feature on the agenda.

Wages are not increasing because companies are increasing leverage at the cost of capex and this can continue for a time until rates move higher. When that happens stress may follow.

Market Recap.

Equities: The S&P 500 fell 0.21% and the Dow fell 0.46%.  The Vix closed at 14.42 while the Stoxx Europe 600 Index fell 0.6%.

Currencies: The Bloomberg Dollar Index rose 0.3% while the euro fell 0.2% and the pound fell 0.1%.

Bonds: (as at 4.30pm). The ten-year is trading at 2.545%. The 2-year is trading at 2.347% and the 30-year is at 2.934%. The U.S. curve closed on the day with the following closes 2/10 at 19.4 bp, 2/30 at 59.3 bp and the 10/30 closed at 38.7 bp. The U.S. 5-year closed at 2.347%. The 2/5 spread is now -0.2 bp. The ten-year bund closed at 0.03% and the British gilt closed at 1.19% while the 10-year yen gilt is trading -0.031%.

Commodities: WTI fell 2.8% and gold fell 1%.

Bitcoin is trading around $5,411.

Aussie Market Today.

Aussie equities are entering a strange phase. The rally Down Under has largely been in synch with overseas markets and prices have risen. The interest will be, what happens if we get an easing and we don’t get earnings growth.  The concern is earnings growth and there appears to be a lack of growth there. Also stymying earnings growth are the bank results. As a result of the Royal Commission and regulatory changes in both Australia and New Zealand, the banks are to set aside more capital and pay fines, resulting in falling earnings. The NAB results point towards this problem and so too commentary out of the ANZ.

Bonds are looking towards  RBA meeting next week as well as the election. Given the movements offshore and with important economic data due Friday in the U.S., the longer end may sell a little allowing the curve to steepen and once we know the outcome of the RBA meeting in all likelihood will try to flatten. The curve movements have caused some interesting movements in swap. Credit remains bid and it appears as though we may be in for some issuance. Sydney Airport, Qantas and AMP Capital are apparently seeking investor interest. I expect that they will have no problems issuing.