Major indices in the US rose for the third week in row as the bulk of the US earnings season is out of the way, with the S&P and Nasdaq trading shy of their all-time highs seen at the end of March (at the time of writing) while in Europe the STOXX 600 posted its best weekly return since January. As per our last week note Plunge protection team to the rescue markets continued to be supported by decreasing liquidity pressures, residing geopolitical risk and resilient earnings, despite the prolonged high interest environment.
Market attention for the week will focus on the US CPI report on Wednesday 15 May where it will be determined whether the recent trend of consecutively hotter-than-expected reports extended into April. The market expects a headline YoY change of 0.4% and 0.3% for core, with the OIS now pricing the first cut in September and two cuts for the year. However, following the markets recalibration of inflation expectations after the latest CPI beats, we now see more risks for a CPI miss to the downside that could potentially further fuel the upside momentum in risk assets, as the Owners' Equivalent Rent component of the CPI basket (c.43% of CPI basket) has been lagging the drop in current rents, setting up for one or more months of downside surprises ahead. Given the Fed has made it clear that inflation is keeping it from cutting rates, we expect a miss to be a significant market mover.
Before Wednesday's CPI report, focus will be on US producer prices on Tuesday 14 May. Last week, employment data pointed to a slowing economy on the back of cooling employment and unemployment benefits rising to the highest level in more than eight months, amid stickier inflation, posing a challenge to the outlook for Fed policy, with yields dropping on the back of the weaker jobs report. UK labour data will be reported on the same day and, given the BoE last week left the door open to both a hold or a cut in June, the release has greater relevance. Wages ex-bonus were +6% YoY last month and are now expected at 5.9%, with a lower print needed to justify cuts.
Over the last week we have also seen a meaningful decrease in the US Treasury Cash balance and a slight uptick in US balances with the FED, with both having an overall dampening effect on rates, while dealer gamma is now estimated above USD7bn after seeing one of the largest weekly increases in long gamma. In addition, now that 90%+of the SP500 has reported, buybacks are expected to return in full swing and CTAs are modelled buyers for both global bonds and equities and amidst a period of low traded value, the mismatch in demand and supply could be further supportive to the upside. We maintain our July24 470 calls on Nasdaq (QQQ) given our short-term bullish view on the markets.