To pause in September or not to divides Fed watchers | Financial News

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TO PAUSE IN SEPTEMBER OR NOT TO DIVIDES FED WATCHERS (1340
EDT/1740 GMT)

For the Fed, when to pause hiking interest rates or not is
the big question, and it’s making Wall Street rather anxious.

With the Federal Reserve’s tightening cycle barely started,
a debate is simmering over when and if the U.S. central bank
might pause raising rates to assess the economic landscape.

The question has created such a stir it has divided the best
of Wall Street shops.

The Fed is much more likely to shift to 25 basis point hikes
in September than to do nothing as it’s well behind the curve,
global economists Ethan Harris and Jeseo Park at BofA Securities
said in a note on Tuesday.

“A pause is possible but is unlikely to last long unless the
economy and inflation slow much more than expected,” they said.

However, BofA rates strategists Ralph Axel and Bruno
Braizinha last week differed. But they made clear their view was
not the base case of the bank’s economics team, whose take has
been incorporated into their rates forecast.

A pause when the federal funds rate reaches 1.75%-2% at the
FOMC meeting in September could become more likely if financial
conditions worsen and data soften, the strategists said.

“We believe the market may assign a higher probability to
these pause scenarios over the next couple of months,” the rates
strategists said. “As this happens, it should become evident
that peak yields in the belly and the backend of the curve are
behind us,” they said.

Fed policy-makers hiked rates by half a percentage point at
the May 3-4 meeting in a bid to counter rampant inflation.
Minutes of the meeting showed most participants said further
hikes of that magnitude in June and July could be appropriate.

No word yet on September.

(Herbert Lash)

BEAR-MARKET BOUNCE BEFORE BOTTOM FALLS OUT (1215 EDT/1615
GMT)

U.S. stocks finally perked up last week. In fact, the S&P
500 popped more than 6%, for its biggest weekly rise
since November 2020.

That said, Michael J. Wilson, equity strategist at Morgan
Stanley, says in the absence of a peace agreement in Ukraine, he
thinks it’s difficult to construct a case for more than a bear
market rally.

As Wilson sees it, higher inflation and slower growth have
now been become the consensus. However, he doesn’t believe it
has been fully discounted.

Meanwhile, he thinks falling PMIs suggest at least 10%
downside from around current levels, while a recession would
provide even greater risk. Sustainable rallies will require
growth rates to bottom, which is something Wilson doesn’t see
happening until later this year.

Wilson says that the market achieved his near-term minimum
downside target of 16.5x EPS and 3,800 on the S&P 500
when it slid intraday to 3,810.32 on May 20.

Therefore, he thinks it’s not surprising that there’s been
some relief given the extent of oversold conditions.

However, since Wilson believes that inflation remains too
hot for the Fed’s liking, he thinks any surprise pivot that
might stoke animal spirits in the short-term, will be too
immaterial to alter the equity price downtrend.

Wilson’s bottom line is that last week’s strength will prove
to be another bear market rally with maximum upside near
4,250-4,300, or around 2%-3% above current levels. The Nasdaq
and small caps are likely to outperform, “as is typical during
such rallies – i.e. more heavily shorted areas do the best.”

Wilson thinks the turning point for the next leg of the bear
may coincide with the next FOMC meeting where “it will likely be
clear they are far from dovish,” as well as the beginning of Q2
pre-announcemnet season and the time when companies guide their
numbers down before reporting.

“We stand by our call that the S&P 500 will trade close to
3,400 by the end of 2Q earnings season-i.e., mid-August.”

A decline to the 3,400 area would put the S&P 500 down
nearly 30% below its Jan. 3 record close.

(Terence Gabriel)

EUROPE: MAY WAS A ‘SELL’, BUT NOT FOR EVERYONE (1145
EDT/1545 GMT)

There it is, no last-minute turn-around: the STOXX 600 ends
the day down 0.9% and exits the month of May with a 1.7% loss.

Of course, it would have been much worse without the 6%
rebound the index pulled off from the lows touched during the
first half of the month.

Nonetheless, the pan-European index now stands 9% lower than
it was at the beginning of 2022.

So far, March has been the only month of gains for the STOXX
600 but other national benchmark indexes have managed to secure
much better results.

Take the FTSE 100, London’s blue chip index, heavily
loaded with miners, oil & gas stocks and banks, gained about
0.8% in May and is up 3% year-to-date.

The British benchmark also managed to end the day up 0.1%
when most of its European rivals finished deep in the red.

“Once again stronger commodity prices, led principally by
oil, have been the foundation of the FTSE 100’s strength”,
commented IG analyst Chris Beauchamp.

As you can see below, the only monthly loss suffered by the
footsie was in February, a performance which contrasts with the
broader European market:

It’s fair to say that there isn’t much optimism for what’s
to come next with data showing a new 8.1% inflation record for
the euro zone and oil prices jumping to the news of an EU ban on
most Russian imports.

“The ban, amid already high inflation and intense supply
chain pressure, will push the Eurozone into a recession”,
Rabobank analysts who see the economy contracting by 0.1% in
2023, argued in note.

(Julien Ponthus)

COOLING DAYS: CONSUMER CONFIDENCE, HOME PRICES, CHICAGO PMI
(1130 EDT/1530 GMT)
Data released on the first day of the U.S. summer season showed
the economy was moving past its heatwave, a welcome development
for Fed watchers hoping for the proverbial “soft landing,” and
inflation to cool down without the unpleasantness of recession.

The mood of the American consumer dimmed a tad this month,
but not as much as expected.

The Conference Board’s (CB) Consumer Confidence index
shed 2.2 points to deliver a reading of 106.4, a
brighter number than the 103.9 consensus.

Diving into the report, inflation expectations eased and the
“jobs hard to find” element grew, both signs of a cooling
economy – and perhaps counterintuitively, good news in that it
implies waning demand and eventually inflation easing.

The “present situation” index fell 3.3 points to 149.6,
while the “expectations” component eased down to 77.5, a 2.5
point drop.

“The decline in the Present Situation Index was driven
solely by a perceived softening in labor market conditions,”
writes Lynn Franco, senior director of economic indicators at
CB. “That said, with the Expectations Index weakening further,
consumers also do not foresee the economy picking up steam in
the months ahead.”

The narrowing of the gap between those two elements is a
good omen for those fearing impending recession.

As seen in the graphic below, when the gap between the two
grows, recession has historically been soon to follow:

U.S. home price growth unexpectedly heated up to record
levels in March.

Year-on-year growth rate of the S&P Corelogic Case-Shiller
20-city composite climbed one percentage point to
an astounding 21.2% – the hottest reading in the index’s 35-year
history – defying the slight decline to the even 20% analysts
predicted.

Once again, the happy trio of tight supply, materials
scarcity and solid demand fueled the growth. But a spate of
housing indicators for more recent months suggests the house
party may be winding down.

“The good news for buyers is that these are signs pointing
to a stabilizing market ahead,” says Steve Reich, COO of finance
at America Mortgage.

Home sales, mortgage applications, building permits and
homebuilder sentiment – they all show a sector groaning under
the weight of its own success, with home prices and climbing
mortgage rates causing the dream of ownership to drift beyond
the grasp of many potential buyers, dampening demand.

“Mortgages are becoming more expensive as the Federal
Reserve has begun to ratchet up interest rates, suggesting that
the macroeconomic environment may not support extraordinary home
price growth for much longer,” says Craig Lazarra, managing
director at S&P DJI. “Although one can safely predict that price
gains will begin to decelerate, the timing of the deceleration
is a more difficult call.”

Of the 20 cities in the composite, 19 posted increases in
their top decile. Tampa took Phoenix’s crown, its home prices
surging 34.8% year-on-year, with Phoenix and Miami placing and
showing at 32.4% and 32.0%, respectively.

It should be noted, however, that the Case-Shiller report is
more ancient history than most economic data. More recent
indicators (CPI, PPI, PCE, wage growth, import prices) all point
to March as the inflation peak.

The graphic below shows the 20-city composite against the
Mortgage Bankers Association purchase applications index:

Factory activity in the Midwest surprised to the upside in
May, by accelerating.

MNI Indicators’ Chicago purchasing managers’ index (PMI)
gained 3.9 points to 60.3, defying economists’ call
for a deceleration to 55.0.

A PMI number over 50 indicates a monthly increase of
activity.

The report is sunnier than the Philly Fed and Empire State
manufacturing data released earlier in the month and bodes well
for the Institution of Supply Management’s nationwide PMI report
due on Wednesday, which is expected to show a modest slowdown of
activity expansion.

“Other regional surveys for May are, on net, suggesting
modest slowing in manufacturing,” says Rubeela Farooqi, chief
U.S. economist at High Frequency Economics. “Overall, even as
the survey data are signaling some moderation, manufacturing
output continues to expand in spite of supply network
dislocations and shortages.”

Wall Street was lower in early trading, with the S&P and the
Dow setting course for a near-flat May, with the tech-heavy
Nasdaq set for its second straight monthly decline.

Cyclicals and economically sensitive transports were
among the biggest losers.

WALL STREET HIT BY FEARS OF INFLATION, MORE HAWKISH FED
(1000 EDT/1400 GMT)

Wall Street is falling about 1% early on Tuesday after data
showed inflation in the euro zone rose to a record high in May
and a Federal Reserve governor raised the possibility of a
harsher crackdown on rising prices than previously expected.

Ten of 11 S&P 500 sectors are in the red, with the
exception of a gain in energy, as oil prices rally after
the European Union agreed to a partial and phased ban on Russian
oil and China decided to lift some coronavirus restrictions.

European Union leaders agreed on an embargo on…