Daily Market Outlook, May 22, 2024

Munnelly’s Macro Minute…

“Sticky UK Inflation Supports Sterling, FOMC & Nvidia On Deck Later”

Asian equities stumbled due to a lack of domestic drivers, while the S&P 500 approached another all-time high ahead of Nvidia's earnings. Mainland China and Hong Kong stocks traded in narrow ranges, with Japan seeing a slight decline. The S&P 500 set its 24th record of the year, with minimal movement in US stock futures and a slight increase in European market contracts in Asia. The Reserve Bank of New Zealand hinted at potential interest rate cuts starting in 2025, leading to a surge in the New Zealand currency and government bond yields. The central bank maintained its interest rates for the sixth consecutive meeting.

Newly published data shows that UK CPI inflation dropped to 2.3% from 3.2% in March, the lowest level since December 2021. However, the decrease was not as large as expected. This decline was mainly driven by lower energy prices as a result of the new Ofgem energy price cap. Core inflation, which excludes food and energy, also decreased less than anticipated to 3.9% from 4.2% in March, with services prices remaining relatively stable, dropping slightly to 5.9% from 6.0%. Despite the significant drop in the headline inflation rate, the higher-than-expected figure diminishes hopes for a June interest rate cut from the Bank of England. However, there is one more inflation release before the June policy meeting, which is expected to show a further decline closer to the 2.0% target. April's UK public finance data revealed a slightly higher-than-expected net borrowing figure of £19.6bn for the first month of the new financial year, which is just over a billion higher than the same month last year.

The rest of today's data slate is scant. The UK house price index from the ONS suggests that the market may have reached its peak. In the US, existing home sales are expected to have declined for the second consecutive month in April, following a large increase in February that was seen as unsustainable.

Bank of England policymaker Breeden is scheduled to speak today, focusing on the technical aspects of macroprudential policy rather than immediate interest rate outlooks. Several US Federal Reserve policymakers are also scheduled to speak.

This evening, the US Fed will release the minutes from its last policy meeting in late April and early May. Prior to that meeting, there were concerns in the markets that the Fed might signal a need for further rate hikes. However, the message that the next rate move is likely to be a cut, though it may be delayed due to persistent inflation, reassured investors. According to fed fund futures, there is approximately a 66% probability of a rate cut by September, with 43 basis points of easing already factored in for the year. The market is anticipating significant movement in Nvidia's stock after their earnings report, with options indicating a potential 8.7% swing in value, which could impact the company's market worth by $200 billion. Analysts are questioning the potential for further growth considering Nvidia's already impressive 77% profit margin and a 93% increase in stock value this year.

Overnight Newswire Updates of Note

New Zealand Holds Rates, Now Sees Cuts Starting Later In 2025
Waller Says Fed Could Cut Rates At ‘End Of This Year’ If Data Softens
Fed’s Collins, Mester Emphasize Need For More Data To Cut Rates
ECB’s Lagarde Sees June Rate Cut With Inflation ‘Under Control’
ECB’s Nagel: Back-To-Back ECB Rate Cuts Not A Given
BoE Governor Predicts ‘Quite A Drop’ In UK Inflation In April Figure
Cboe Posts Amended ETH ETF Filings, Industry Renews Approval Hopes
US To Sell Gas In NE Reserve As Summer Driving Season Kicks Off
Apple Takes Steps Toward Asking Court To Dismiss US Antitrust Case
China May Raise Tariffs On Some US, EU Cars, Lobby Group Says
Israel-Saudi Normalization Deal Within Reach But Israel Might Balk

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0825-35 (1.6BLN), 1.0860 (836M), 1.0875-85 (602M)
USD/CHF: 0.9100 (429M). GBP/USD: 1.2740-50 (818M)
AUD/USD: 0.6640-55 (685M). NZD/USD: 0.6100 (836M)
USD/CAD: 1.3625 (730M), 1.3680 (1.1BLN), 1.3725 (802M)
USD/JPY: 154.00 (2.1BLN), 155.00 (385M), 155.60 (1.2BLN)

CFTC Data As Of 17/05/24

Japanese yen net short position is -126,182
British pound net short position is -20,075
Euro net long position is 17,155 contracts
Swiss franc posts net short position of -41,107
Bitcoin net short position is -177 contracts
Equity fund managers raise S&P 500 CME net long position by 60,168 contracts to 920,863
Equity fund speculators increase S&P 500 CME net short position by 40,882 contracts to 279,337
Gold NC Net Positions: $204.5K vs $199.6K