ON DECK FOR MONDAY, MAY 5
KEY POINTS:
- N.A. equities rethink risks ahead of the FOMC
- Trump’s itchy tariff trigger finger remains twitchy
- Oil prices are already shaking off the weekend’s OPEC+ surprise
- Australian markets didn’t take very kindly to another center-left victory
- Elbows up for Carney, or postpone after Trump’s weekend comments?
- Swiss CPI adds a touch to SNB negative rate pricing
- US ISM-services on tap
- Global Week Ahead—Checkmate! (reminder here)
Risk-off sentiment in N.A. equities is dragging US and Canadian futures down by ½% to 1% with European cash markets divided between modest gains and losses. Sovereign curves are little changed except for underperformance across curves in Australia and NZ after the Australian election. Oil prices are volatile, with WTI initially dropping by about US$2½ overnight but clawing back much of that since then. Some of the risk-off sentiment is perhaps in anticipation of a relatively neutral-hawkish sounding FOMC on Wednesday in the wake of repricing post-nonfarm expectations toward fewer cuts this year. Some of the move may also be on the heels of more Trump-talk this weekend, some of which was totally unglued and finally getting more attention (here), while the rest ranged from market manipulating talk of imminent trade deals to further attacks on Chair Powell and Canada. That Trump’s tariff trigger finger remains twitchy was highlighted by his hastily announced pledge to apply a 100% on foreign produced films which will be very difficult to implement, and in any event is a self-imposed tax on studios that have lost their edge over the years to often higher quality movies made by studios outside of Hollywood.
IS OPEC+ MESSING UP AGAIN?
WTI and Brent oil prices are down by less than a buck after a surprise move by OPEC+ that was led by the Saudis. OPEC+ agreed to increase output by 411,000 bps starting next month and seeks to unwind voluntary output cuts by October. Over the past three months, output has been increased by 960,000 bpd which as reported by Reuters translates to a 44% decrease in the 2.2 million bpd of previously agreed upon reductions. The alleged motives include penalizing overproducers like Iraq and Kazakhstan, plus leaning against US shale. It also strikes me as foolish by a cartel that has long been waning in influence, finds it difficult to enforce its measures like any other oligopoly that struggles with cheaters, and that has messed up on multiple past occasions. After all, downside risks to global growth and increased output seem like an odd combination to pursue.
AUSTRALIAN MARKETS DON’T TAKE KINDLY TO CENTER-LEFT VICTORY
Australian markets didn’t seem to take too kindly to the center-left’s victory. The Australian government bond curve is underperforming elsewhere with yields up by 4–6bps in a mild bull flattener move. The local stock market fell by about 1%. The A$ is firmer to the USD on a generally down day for the USD.
The Australian Labour Party won 85 seats, 9 more than needed for a majority which is a better outcome than Canada’s center-left Liberal Party was able to secure with its minority. Still, as elsewhere, Labour’s Victory was driven y just 34.8% of voters which maintains the pattern of how governments in the UK, Canada and Australia won with far less than majority support among voters in deeply divided electorates. Labour is also tracking a lead in the Senate where 40 of 76 seats were up for grabs and Labour is leading in 28 of the 40. And it is tracking a slim lead in the House (chart 1).
SHOULD CARNEY SUSPEND HIS TRIP TO WASHINGTON?
Elbows up, or pull out? Canadian PM Carney is slated to go to Washington today for a meeting with Trump tomorrow. Trump repeated 51st state nonsense and that using military force to annex Canada was “highly unlikely.” There is a case for Carney to declare that the US is not negotiating in good faith and to suspend his trip for as long as Trump engages in talk that is a direct affront to Canadian sovereignty while refusing to 100% rule out military action which we all know is nutty talk in any event. I very much doubt Carney would do that, but there is significant risk to Canada-US relations into this meeting with a lot on the line for Carney after rushing this meeting.
SWISS CPI ADDS A TOUCH TO SNB CUT PRICING
Swiss CPI surprised lower than expected. April’s reading of 0% m/m (0.2% consensus) and with core at 0.6% y/y (0.8% consensus) was followed by the addition of a few basis points to priced easing for the June 19th meeting and with about 43bps of cuts priced by year-end. Core CPI in m/m NSA terms was among the weakest readings on record for like months of April (chart 2). Markets are assuming the SNB is open to negative rates by next month and for the first time since September 2022. Key is the ongoing strength of the Swiss franc. Since the SNB’s last meeting on March 20th, the franc has appreciated by 7%, leading the majors against the USD.
LIGHT US DATA ON TAP
ISM-services for April is due out this morning (10amET). Most expect a mild deterioration. Its hiring attitudes reading is an after-thought following payrolls, but watch the prices paid measure with most of the higher price signals on the manufacturing side so far (chart 3). Granted, tariffs only just kicked in this past weekend and will lift May inflation figures.
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