Rise and shine everyone!

Today is Fed Day! As the markets wait in anticipation of what Jay Powell has to say, we see treasury yields ticking up yet again. The recent US Treasury refunding announcement didn’t help much at all, and now we’re seeing yields remain volatile.

While we have not reached peak bond volatility as we can see above, we are starting to see a gradual steepening in the yield curve. Long end yields are now being driven more by inflation estimates vs. growth, and that’s never helpful for equities.

With higher yields, we see lower margin expansion and therefore, without earnings taking the lead, we will continue to see pressure on stock prices. If we can see more solid earnings come through in the second quarter, that may start to reverse things.

Earnings have not been a big help this week. McDonald’s, Starbucks, Amazon, and AMD all delivered lackluster results. The one positive is that we have almost 50% of the companies exiting the buyback blackout window. This window for buybacks will be open until 14 Jun 2024, with more and more corporates exiting the blackout period.

Most of the market is expecting a hawkish Fed, and we shouldn’t be too surprised if that what we get. There’s almost no chance of a rate cut and I doubt that we will get a firm answer on the timing of the first cut. The market has now priced out most of the rate cuts this year - Fed Fund Futures is pricing in 23 bps of rate cuts this year… so just about 1 cut.

QRA came as a surprise; Full announcement at 8:30 am ET

The US Treasury’s Quarterly Refunding Announcement definitely came as a surprise to the markets (although I am not sure why)! The announced the April to June borrowing estimate at $243B compared to the estimate of $202B. The US Treasury will be borrowing more. This shouldn’t be a surprise.

The details of the refunding announcement just came out.

• US Treasury to sell $58 bln in three-year notes, $42 bln in 10-year notes, $25 bln in 30-year bonds.

• US Treasury says through July 2024 plans to hold weekly liquidity support buybacks of up to $2 bln per operation, up to $500 mln in tips.

• US Treasury says it does not expect to increase nominal coupon, or floating-rate note auction sizes for next several quarters.

• US Treasury says it intends to change regular six-week cash management bills into benchmark bill.

• US Treasury: It's prudent to continue incremental increases in tips auction sizes in the May to July quarter.

• US Treasury says to increase June five-year tips reopening auction size by $1 bln to $21 bln.

• US Treasury says to keep May 10-year tips reopening auction size at $16 bln.

• US Treasury: We're to raise the July 10-year TIPS new issue auction size by $1 bln to $19 bln.

The Euro Area just may stick the landing

Yesterday’s data coming out of the Euro Area was quite remarkable. We need to be asking whether Christine Lagarde is proving to be the best Central Banker there is out there! Because she’s certainly navigated this journey better than most.

Euro Area GDP growth came out higher than expected and Inflation seems to be under control, although core inflation surprised to the upside just a bit. We don’t believe this will deter the ECB from rate cuts in June but, rather may change the pace of cuts for 2024. Most analysts are pricing in 4 or maybe even 5, 25-bps cuts for this year. Our view is more leaning towards 75bps in total or 3 cuts. If the Fed keeps rates higher for longer, we expect that will feed into higher yields in the Euro Area as well to keep conditions tight.

Saudi GDP Down Again

Saudi Arabia's GDP decreased by 1.8% year-on-year in the first quarter of 2024, according to preliminary data. This decline follows a 4.3% decrease in the previous quarter, marking the third consecutive quarter of economic contraction. The downturn was primarily due to a significant reduction in oil production, which dropped by 10.6% compared to a 16.2% decrease in the fourth quarter of 2023. This is something that we’ve highlighted time and again because Saudi Arabia bears a higher proportion of the oil production cuts.

Additionally, there was a slowdown in growth in non-oil sectors, which grew at 2.8% versus 4.2% previously, and in government activities, which increased by 2% compared to 3.1% in the earlier period. Given this situation, Saudi Arabia needs to cover their budget which also includes all the new investment initiatives. This leads us to question whether they will continue to maintain lower production levels in the second half of the year.

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Calendars

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