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Good afternoon,

Warren Buffet pounded the recession alarm by dumping $13 billion of stocks. Politicians are pounding up against the debt ceiling as traders worry a deal may lead to a stock market liquidity drain.

Will the last bull please turn off the lights? Thanks, Jim.

Let’s dive in.

Economy Heat Check

As of 5/19/2023 market close, unless otherwise stated.

Friday Flashback

• China’s Q2 data continued to stumble, with retail sales, industrial production and fixed asset investment all falling below expectations.

• Japan’s GDP was stronger than expected, but weak trade data continues to show that waning growth is a growing problem.

• A core measure of Japan’s CPI rose to a 42-year high, yet with producer prices plummeting, the BOJ has the data it needs to assert that inflation will be transitory.

• The Nikkei smashed through 30k for the first time in 20 months and to a 32-year high, thanks to the BOJ retaining an ultra-easy stance.

• Softer Australian employment cooled rate-hike expectations for the RBA, even though wages rose slightly higher than expected.

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Bullish & Bearish

↑ Stock Market: The Nasdaq 100 and S&P 500 have risen to 9-month highs.

↑ USD: The Dollar Index is entering the third week of its strong rally, following a series of stronger than expected data, hawkish Fed comments and a sharp rise in US rates.

↓ Currencies: The yen (¥) lost its safe-haven appeal.

↓ Gold: Fell comfortably below $2000.

↓ Oil: Prices are slipping as caution around debt ceiling talks, but hedge funds' ultra-bearish oil bets signal US recession angst.

↑ Crypto: XRP jumped by 10% last week after reports that the SEC’s landmark case against Ripple was tilting in favor of the blockchain firm.

↑ Money-Markets: Funds continue to pull investors, as the cash pile hits a record-high $5.34T.

Week Ahead: Signal to Noise

This week’s market outlook and whether you should actually care.

Signals 

J Pow’s PCE 

Just when you thought when you thought he may catch a break, Fed Chair Powell’s favorite inflationary indicator, the Core PCE Price Index, drops this Friday heading into the Memorial Day weekend. The April PCE deflator is currently anticipated to have increased 0.3% in both the headline and core measures.

If those expectations hold true (they never do), we could see the headline rate inch from 4.2% to 4.3%. The core rate may experience a slight dip from 4.6% to 4.5%. If the core rate does indeed rise by 0.3%, the annualized rate through April would settle at 4.6%.

That’s where things get interesting – or where policy makers, unfortunately, may have to do some actual work. Due to methodological differences, there's a chance that the core PCE measure could exhibit more stickiness compared to the core CPI, with a greater emphasis on airfares, accommodations and financial services. Those factors could contribute to the core PCE measure maintaining its position even as other indicators fluctuate.

Before the Fed drops its mic on June 14 after its two-day meeting, it will have plenty date at its disposal. That includes another employment report on June 2 and the CPI report on June 13. Preliminary estimates suggest that nonfarm payrolls might experience a rise of approximately 175,000.

Flash PMIs

Tuesday is this week’s time for market-moving action as the eagerly anticipated Flash PMIs take center stage. These leading indicators are likely to set the tone for the week ahead, providing valuable insights into the likely path of GDP figures.

Brace yourselves, because interns aren’t the only thing about to be unleashed onto the desk. S&P Global is set to unleash a flurry of flash reports for Australia, Japan, the Eurozone, France, Germany, the UK and the US at the beginning of the week. These reports could have a marked impact on market sentiment, sending ripples through markets. But, that outcome requires a bunch goes really right, or wrong, which often doesn’t happen.

Flash PMIs often exhibit a certain inclination, leaning one way or another. If we witness stronger or weaker than expected results for Australia and Japan, there's a chance traders anticipate a similar pattern to unfold for Europe and the US.

On top of that, separate reports are also dropped for insights into the services and manufacturing sectors. So, a series of stars need to align. Let’s just say they get along about as much as the average in-laws.

German Ifo Sentiment

German business expectations, as signaled by the Ifo Business Climate Index, are about as fickle as its Index’s capitalization. Eurozone inflation remains at dumpster-fire levels, igniting an equally fiery response from some ECB members who are adopting a no-nonsense stance. It now appears that dumpster fire distracted the EU from the country that always holds its bag: Germany.

In European terms, there’s been “troubling” economic sentiment emanating from Germany. Let’s put it plainly: it’s down bad. The ZEW 1-year expectations index, a mirror reflecting the outlook for both Germany and the Eurozone, has been on a downward spiral for the past three months. There's a fair chance we'll witness a similar downward trajectory in the upcoming Ifo report.

This downward trend not only provides some relief to the ECB, as it eases the pressure on them to raise interest rates, but it also casts a shadow over the euro. Plus, let's not forget about our friends across the pond, the Fed members, who have been chirping quite hawkishly away as of recent.

But don’t get bogged down in the battle of the central banks. One of the bigger pictures to track is the EUR/USD exchange rate. There have been numerous failed attempts to breach the mighty 1.1100 level, leaving futures traders overwhelmingly bullish on EUR/USD. But, if European data continues to disappoint harder than the Lakers, a legion of hopeful EUR/USD traders may find themselves stranded on the wrong side of the market.

RBNZ Rate Decision

The Reserve Bank of New Zealand (RBNZ) is gearing up to make a crucial cash rate decision this Wednesday, potentially marking the end of its tightening cycle. The RBNZ has a staggering 11 rate hikes under its belt, mostly in hefty 50 basis point increments. It’s only ventured into deeper waters of 75 bps once, with that hike happening in Q4 last year.

All eyes are on what the RBNZ does next. Due to a sudden dip in inflation expectations, market participants are bracing for a more modest 25 basis point hike. That would nudge the rate from 5.25% to 5.5%.

Recent data from an RBNZ survey reveals a remarkable plunge of 51 basis points in 1-year inflation expectations. That marks the most significant decline since the pandemic took hold. Out of 25 economists surveyed, a substantial majority (of 21) predicted a 25 basis point hike. Not to mention, the 1-month OIS market has already fully priced it in, indicating strong market consensus.

Like any good reality star, when the RBNZ has its fifteen minutes, it’s going to milk them for all they’re worth. Adding to the intrigue of the rate decision, the RBNZ will also unveil their quarterly Monetary Policy Statement (MPS), a document that carries substantial weight in guiding market sentiment. Watch for any upgrades to forecasts or language that indicates whether they truly believe this hike will be the final one.

Noise

Monday, May 22:

• Canada: Public holiday 

• China: Losan Prime Rate

• Switzerland: Industrial Production; M3

• EU: Construction Output; Consumer Credit

Tuesday, May 23:

• US: Build Permits; Richmond Fed survey; New home sales

• UK: PSNB Ex Banks GBP

• Canada: Producer Prices

• New Zealand: Retail Sales

• Japan: Reuters Tankan N-Man Index

Wednesday, May 24:

• US: MBA Mortgage Applications

• Japan: Chain Store Sales; Foreign Stock Investment

• UK: CPI; PPI; CBI Trends (Orders)

• Australia: Composite Leading Index

• New Zealand: Cash Rate

• Mexico: Inflation

Thursday, May 25:

• US: GDP 2nd Estimate; Initial jobless claims; Pending Homes Index; KC Fed Composite Index

• South Korea: Bank of Korea Base Rate

• EU: GDP (Germany); GfK consumer sentiment (Germany)

• UK: CBI Distributive Trades

• Canada: Business Barometer

• Mexico: Trade Balance

• Japan: CPI (Overall Tokyo); Service PPI

Friday, May 26:

• US: Durable Goods; UMich Consumer Sentiment (final); Inflation expectations; Dallas Fed PCE

• Australia: Retail Sales

• Japan: Leading Indicator

• UK: Retail Sales

• Switzerland: Non-Farm Payrolls

• Mexico: GDP (final)

• Canada: Budget Balance

• China: Industrial profit (YTD)

Lit's Picks

• Instagram is reportedly onboarding creators to a new text-based app, codenamed Project 92.

• The freight rejection rate (2.53%) is said to lead the economy by six months, and now below its COVID all-time-low.

Meme Bank

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