Rise and shine everyone.

US Equity Futures are lower this morning, led down by small caps. This is something I pointed out yesterday in the Chart of the Day - the YTD Performance of small caps for the US is seriously lagging the market. With bond yields still remaining elevated, the Russell 2000 small cap index doesn’t have the mega cap tech to keep pulling it higher.

Markets may remain somewhat quieter ahead of tomorrow’s double data release - the CPI and the Fed. We also have the 10Y note auction today at 1pm and China’s Inflation numbers later tonight.

Yesterday’s $58B 3Y US Treasury note auction was softer, pushing yields higher. Yields are giving up some of those early gains this morning ahead of the 10Y note auction today at 1pm ET. With the EUR & JPY pulling back the USD Index is higher this morning. The US Dollar is certainly breaking out here but, there is an area of potential resistance to watch out for.

Copper is pulling back sharply this morning, along with other commodities. While still up on the year, the base metal has erased a significant portion of its gains from the rally last month. Natural Gas is the only commodity that’s continuing its May rally.

US Optimism Improves - Businesses suffer inflation; Consumers expect a better stock market.

US Small Business Optimism Index just released this morning is showing an improvement.

“The NFIB Small Business Optimism Index in the US rose to 90.5 in May 2024, the highest in five months, from 89.7 in April and above forecasts of 89.8. 22% of owners reported that inflation was their single most important problem in operating their business, unchanged from April and the top business problem among owners.”

This comes after an improved reading from the NY Fed.

The May 2024 Survey of Consumer Expectations from the Federal Reserve Bank of New York reveals that inflation expectations have declined, while consumers are more optimistic.

• Inflation Expectations:

  • One-year horizon: Declined to 3.2% from 3.3% in April; Three-year horizon: Unchanged at 2.8%; Five-year horizon: Increased to 3.0% from 2.8%.

  • Home price growth expectations: Unchanged at 3.3%.

  • Expected price changes: Unchanged for gas (4.8%), food (5.3%), and rent (9.1%); increased for medical care (9.1%); decreased for college education (8.4%).

• Labor Market:

  • One-year-ahead expected earnings growth: Unchanged at 2.7%.

  • Unemployment expectations: Increased to 38.6% from 37.2%.

  • Probability of losing one's job: Decreased to 12.4%.

  • Probability of leaving one's job voluntarily: Increased slightly to 19.6%.

  • Probability of finding a job if current job is lost: Increased to 52.2%.

• Household Finance:

  • Expected household income growth: Increased to 3.1%.

  • Expected household spending growth: Declined to 5.0%.

  • Probability of missing a minimum debt payment: Decreased to 12.0%.

  • Financial situation: Improved, with more respondents feeling better off than a year ago.

  • Stock market expectations: Probability of higher stock prices in 12 months increased to 40.5%.

UK Markets Lower on Higher Unemployment but Stable Wages

UK employment data this morning hasn’t been very comforting. The Unemployment Number hit 4.4% increasing to the highest reading since September 2021. On the other hand, wage growth didn’t change at all.

The Bank of England has been counting on falling wage growth to see a deceleration in core services inflation, which came out hotter than expected last month. So this puts the BoE in a tough spot with higher unemployment but, little effect on inflation. We’re seeing that in the GBP this morning, as it trades higher alongside the pressure on equities - so the market is pushing back rate cuts to November, once again.

Quote of the Day

JPM’s Marko Kolanovic says Equities are disconnected from FX and rates. He continues to remain true to form, proposing UW equities and OW commodities and cash. I don’t disagree with the Commodities Overweight, but I think there are still opportunities in Equities (ex-small caps).

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)