Daily Markets: Will Powell Take a Hawkish Lean?

Today’s Big Picture

Asia-Pacific equity markets finished the day ahead except for China’s Shanghai Composite which fell 0.42%, and Hong Kong’s Hang Seng which closed 1.40% lower as losses from Retail Trade and Technology Services overcame gains from Communications and Utilities. Taiwan’s TAIEX gained 0.45%, India’s SENSEX rose 0.48%, Australia’s ASX All Ordinaries advanced 0.60%, and Japan’s Nikkei closed 0.77% higher. South Korea’s KOSPI added 0.89%, led by Industrial Services. European markets are up across the board in midday trading and U.S. futures point to a mixed open, at least at the time of writing.

Following hawkish comments from Fed officials yesterday and earlier this week, the market is bracing for what Fed Chair Powell may say about the economy, inflation, and monetary policy later this morning. Expectations for a June rate hike have been moving higher as Fed officials have indicated more may need to be done to combat sticky inflation. Ahead of Powell’s comments, the CME FedWatch Tool now sees a 39% chance for another 25-basis point rate hike when the Fed concludes its two-day meeting on June 14. A week ago, that probability was 15.5%.

Should Powell lean more hawkish in his comments, we are likely to see renewed questions about the impact of the fight against inflation on the economy, which has been performing better than expected so far this year. Our suspicion is Powell will lean toward saying the Fed doesn’t see any rate cuts happening in the back half of this year given the inflation data, but in terms of further tightening it will remain data dependent. If we’re right, it means the market will be focusing rather heavily on next week’s April core Price Consumption Expenditure (PCE) index reading, but we would argue inflation comments in S&P Global’s May Flash Purchasing Managers Index (PMI) report next week will be insightful as well.

Data Download

International Economy

The annual inflation rate in Japan rose to 3.5% in April from March's 6-month low of 3.2%, as food prices increased the most since August 1976 (8.4% vs 7.8% in March). CPI Core Core in Japan increased to 4.10% YoY in April from 3.80 percent in March.

The annual producer inflation in Germany eased for the seventh straight month to a 25-month low of 4.1% in April 2023, aligning closely with forecasts of 4%. However, producer prices in Germany rose by 0.3% MoM vs. April, the first increase since September 2022 and a very different outcome than the expected 0.5% drop.

The GfK Consumer Confidence indicator in the United Kingdom rose to -27 in May from -30 in April, improving for the fourth straight month as British households are becoming more optimistic about the economy and their finances despite persistent inflation.

Later this morning, the market will be listening to comments from European Central Bank (ECB) President Christine Lagarde and ECB Executive Board Member Isabel Schnabel about what lies ahead for monetary policy for the bloc.

Domestic Economy

While we have no major economic data being released today, there will be another parade of Fed officials making the rounds today:

• Federal Reserve Chair Jerome Powell is expected to participate in the "Perspectives on Monetary Policy" panel before the Thomas Laubach Research Conference, hosted by the Federal Reserve, in Washington.
• New York Fed President John Williams is scheduled to speak before the Thomas Laubach Research Conference organized by the Federal Reserve Board of Governors, in Washington.
• Federal Reserve Board Governor Michelle Bowman participates in a discussion before the Texas Bankers Association 138th Annual Convention, at San Antonio, Texas.

Markets

Markets continued to advance as talk about the debt ceiling resolution remains positive. Technology names have been driving a good deal of the recent gains and yesterday was no exception as the sector rose 2.05%. The next highest gains came from tech’s cousin, Communications Services (1.80%), followed by Consumer Discretionary (1.55%). Traditionally defensive sectors saw some selling as Utilities, Consumer Staples and Healthcare booked losses between 0.30% and 0.50%, while Real Estate came under pressure, dropping 0.63%. Shares of Bath & Body Works (BBWI) were bid up 10.73% yesterday as markets embraced the company’s earnings beat and an increased profit outlook.

Here’s how the major market indicators stack up year-to-date:

• Dow Jones Industrial Average: 1.17%
• S&P 500: 9.34%
• Nasdaq Composite: 21.23%
• Russell 2000: 1.34%
• Bitcoin (BTC-USD): 61.87%
• Ether (ETH-USD): 50.50%

Stocks to Watch

Before U.S. equity markets begin trading today, Deere (DE), Foot Locker (FL), and RBC Bearings (RBC) are expected to report their quarterly results.

Applied Materials (AMAT) reported April quarter EPS of $2.00 vs. the $1.83 consensus on revenue that climbed 6.2% YoY to $6.63 billion, also besting the $6.37 billion consensus. The company issued a wide guidance range for the current quarter with EPS of $1.56-1.92 vs. the $1.64 consensus and revenue of $5.75-$6.55 billion vs. the $6.05 billion consensus. While the management team shared it sees ~$400 billion of government incentives being deployed globally over the next 5 years, a significant portion of which will be directed toward the IoT, Communications, Automotive, Power, and Sensors (ICAPS) markets, near-term strength in that market is being offset by weakness in the memory market and slowness in the logic market.

Ross Stores (ROST) reported better than expected April quarter results with comp sales up 1% vs. “relatively flat” guidance but guided the current quarter below consensus expectations. Per the management team, "There remains a high level of uncertainty in today’s macro-economic and geopolitical environments. In addition, prolonged inflationary pressures continue to negatively impact our low-to-moderate income customers’ discretionary spend.” For the July quarter, the company targets EPS of $1.07-$1.14 vs. the $1.26 consensus with comp sales for the quarter "relatively flat."

FarFetch (FTCH) reported a smaller-than-expected March quarter loss while revenue rose 8.1% YoY to $556.4 million, besting the $515.37 million consensus. The company’s Gross Merchandise Value increased 0.1% YoY to $931.7 million while its Digital Platform Services Revenue increased 7.7% YoY. For 2023, FarFetch sees Group GMV of approximately $4.9 billion; Digital Platform GMV of approximately $4.2 billion; Brand Platform GMV of approximately $0.6 billion.

Citing “changing business conditions” Walt Disney (DIS) announced it will scrap a near-$1 billion office campus it planned to build in Florida, as well as plans to relocate 2,000 of its California workers to those offices.

Coinbase Global (COIN) is officially launching its zero-fee trading subscription service Coinbase One and expanded its reach to the UK, Germany, and Ireland.

OpenAI has launched an iOS app for ChatGPT that is available in Apple’s (AAPL) App Store and shared an Android version is coming “soon.”

IPOs

Near-term the calendar for such activity looks rather thin. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

Once again, we have made it to Friday, and that means no companies are expected to report their quarterly results after equities stop trading. Those looking for more on which companies are reporting when should head on over to Nasdaq’s Earnings Calendar.

On the Horizon

Monday, May 22

• Eurozone: Consumer Confidence - May

Tuesday, May 23

• Japan: Flash Manufacturing PMI – May
• Eurozone: Flash Manufacturing & Services PMI - May
• US: S&P Global Flash Manufacturing & Services PMI – May
• US: New Home Sales – April

Wednesday, May 24

• UK: Consumer Price Index, Producer Price Index – April
• Germany: Business Expectations Index – May
• US: Weekly MBA Mortgage Applications
• US: Weekly EIA Crude Oil Inventories

Thursday, May 25

• Germany: 1Q 2022 GDP
• Germany: GfK Consumer Climate - June
• US: Weekly Initial & Continuing Jobless Claims
• US: GDP (Second Estimate) – 1Q 2023
• US: Pending Home Sales – April
• US: Weekly EIA Natural Gas Inventories

Friday, May 26

• Japan: Tokyo CPI – May
• UK: Retail Sales – April
• US: Personal Income & Spending, PCE Price Index – April
• US: Durable Orders – April
• US: The University of Michigan Consumer Sentiment Index (Final) – May

Thought for the Day

“What counts is not necessarily the size of the dog in the fight; it’s the size of the fight in the dog.” ― Dwight D. Eisenhower

Disclosures

• Deere & Co. (DE) is a constituent of the Foxberry Tematica Research Sustainable Future of Food Index
• FarFetch (FTCH), Ross Stores (ROST) are constituents of the Tematica BITA Big Spenders & Savers Index
• Apple (AAPL), Microsoft (MSFT) are constituents of the Tematica Research Thematic Dividend All-Stars Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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