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The only thing more inflated than incoming interns’ egos is the Fed’s current lovers quarrel about inflation.

Fresh from Friday’s T-Bill tea party, the Treasury is set to unleash a tsunami of bonds.

Let’s dive in.

Economy Heat Check

As of 6/2/2023 market close, unless otherwise stated.

Friday Flashback

• Debt ceiling negotiations made it past the House, through the Senate and were signed into law by Biden on Saturday.

• The US added 339,000 jobs in May (exp. 190,000). The unemployment rate rose to 3.7%, a 7-Month high.

• Fed Vice Chair Jefferson hinted at a pause in June but warned it may not be the end of the tightening cycle.

• Softer-than-expected inflation prints from Spain, France and Germany helped push the euro down to a 3-month low.

• China’s manufacturing PMI contracted for a second month – its fastest pace in six – while services PMI fell to a 4-month low.

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Bullish & Bearish

↑ Stock Market: Tech stocks were the clear winners of Wall Street in May, with the Nasdaq rising to a 13-month high.

↓ International: The Hang Seng entered a technical bear market (20% lower from its previous peak).

↑ Currencies: Hawkish comments from ECB President Lagarde, combined with dovish comments from Fed members, saw EUR/USD promptly reverse the week’s losses.

↓ Commodities: Inflationary pressures continued to cool, with the CRB commodities index closing at a 16-month low.

↑ Gold: The resurgence of bets the Fed could hold has helped gold climb for four consecutive days.

↑ Oil: Oil prices pop 2.5% after Saudi Arabia pledged more voluntary production cuts (more below).

↓ Crypto: Atomic Wallet hacks led to $35M+ in crypto stolen.

↓ Money-Markets: Vanguard fined $800K for misleading money-market fund customers.

Week Ahead: Signal to Noise

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

Signals

Fed In-Fighting and ISM Services PMI

Fed hiking bets are sideways and so are the Fed members who can’t get their strategies straight. Last week, we sat back and watched as trading repriced and then fully reversed bets of a Fed hike in June. And with members now heading into a blackout period, where comments to the media on monetary policy are a big no go, traders will have to rely exclusively on data to assess the likelihood of another pause or hike. This week, final PMIs are released for the US, Asia and Europe, but eyes will be mostly on the ISM services report to see if services inflation can chill out.

ISM Non-Manufacturing PMI numbers for May kickstarts the week today. But look beyond the headline figure. The price, new order and employment sub-components are even more subjects the Fed will be adding to its internal debate. Following the May jobs report, expect the better-than-expected numbers to raise bets on further Fed interest rate hike. That being said, investors will need the next set of inflation figures to fuel bets on a June move.

OPEC’s Oligarch Problem

The only thing buzzing more than the incoming interns is buzz around the upcoming OPEC+ meeting. More specifically, speculation about potential production cuts and the impact on oil prices. Brent crude prices have dipped below $73 per barrel, erasing previous gains and leaving traders scratching their heads.

They didn’t have to wonder for long, since the Saudi energy minister found someone to hold his beer. He recently warned “speculators” of the possibility of deeper cuts.

Let's not forget the elephant in the room—Russia. They've been promising production reductions for months, but their track record of compliance leaves a lot to be desired. Maintaining credibility without Russia's cooperation is like trying to juggle flaming torches while riding a unicycle—it's a bit of a balancing act.

Some anticipate a deeper production cut is still in the cards, but some crude ride-or-dies believe it may be premature to judge the impact of previous cuts. OPEC itself predicts a tighter market in the second half of the year, with anticipated oil demand growth and a potentially strong third quarter.

Adding to the market’s uncertainty, concerns about economic weakness in the US and Europe have sparked short speculative positions. In this Saudi-produced soap opera, they’re keen to defend a higher price floor, given its ambitious economic transformation plan. But with Russia playing hard to get, OPEC+ might find itself in a game of cat and mouse where compliance is the name of the game.

Banks Abandon Housing Market

Banks have officially dropped housing like it's hot. Investor purchases in the first quarter, reported by Redfin, saw a record-breaking 49% decline. This decline surpasses the drop observed in 2005, prior to the previous market crash. Markets such as Atlanta, Charlotte, Phoenix, Las Vegas, Nashville, Jacksonville and Tampa experienced the largest withdrawal of real estate investors, with declines ranging from 54% to 66%.

Higher interest rates have greatly impacted investor demand, with mortgage rates (6.9%) trading well above the cap rates (4.6%). This signals investors will incur losses on rentals after paying off debts. So, they’ve ceased buying properties altogether.

It is important to clarify that although Wall Street landlords often make cash offers, the cash is typically obtained through debt, mainly from the Mortgage-Backed Security (MBS) market. But this market has collapsed, resulting in landlords raising only $0.6 billion in 2023 – compared to $17 billion in 2021. So here’s to you, regular homebuyers, who have regained market share from investors. That is, if you’re in one of the famous hubs of Charlotte, Atlanta and Phoenix.

The decline in investor purchases historically serves as a leading indicator for the housing market, with the previous bubble experiencing peak investor buying in mid-2005. That was three years before substantial price declines occurred. Housing downturns unfold over a span of 4-5 years. With just the first year completed, there is a long way to go before prices and rates fall sufficiently to attract investors back into the market.

Noise

Monday, June 5:

• US: S&P Global Composite PMI (final)

• Japan: Composite PMI

• Australia: Business inventories, Company profits

• EU: Composite PMI; Producer prices; Trade balance (Germany); CPI (Switzerland)

• China: Caixin Services PMI

• UK: Composite PMI; Reserve assets

Tuesday, June 6:

• Global: Global Supply Chain Index

• Australia: RBA cash rate decision

• EU: HCOB Construction PMI; Retail sales; Industrial orders, Manufacturing output, Consumer goods (Germany)

• UK: All Sector PMI

Wednesday, June 7:

• US: Goods trade balance; MBA mortgage applications; Consumer credit

• Australia: Real GDP

• China: Trade balance; FX reserves

• Japan: Leading Indicator; Bank lending, Foreign investment, Trade balance, GDP (revised)

• UK: Halifax House Prices; RICS housing survey

• EU: Industrial production (Germany); Unemployment (Switzerland)

• Canada: Leading Index; BoC rate decision

Thursday, June 8:

• US: Jobless claims; Wholesale sales

• Australia: Trade balance

• New Zealand: Reserve assets total

• Japan: Economy Watchers Poll; M2 money supply

• EU: GDP (revised); Employment

Friday, June 9:

• China: CPI; PPI

• Canada: Employment report 

Lit’s Pick & Put

↑ Stockpiles of thermal coal at Chinese ports are on the rise. That’s coinciding with higher rail shipments of domestic coal from Chinese mines.

↓ The London Metal Exchange (LME) lost its benchmark status in a pretty big part of the nickel market thanks to last year’s massive short squeeze (BBG)

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