Swissquote: US won’t default, and the Fed will likely skip

2 juni 2023

The US Senate approved legislation to suspend the US debt ceiling through 2024, meaning that the US won’t default by next Monday. The bill now goes to President Joe Biden who will… sign it!

US yields fell and the dollar tanked on optimism that the US’ debt ceiling theater is over, and despite a big beat on ADP print.  

The US economy added 278K new private jobs in May, versus 170K expected by analysts. But Challenger Job Cuts data revealed more than 80K layoffs in May, and the layoffs are up by more than 280% year-on-year. The tech layoffs jumped to the highest levels since the 2000 tech bubble since the beginning of the year, giving contradictory signals to higher JOLTS and solid ADP read.  

Today, the official jobs data is expected to print 180K new nonfarm job additions, a slightly moderating wages growth, and a slight uptick in unemployment from 3.4% to 3.5%. But over the past year, the NFP prints tended to surprise to the upside, and by big chunks at some months. The last time the US printed a NFP figure below 200K was back in October 2021. And over the past year, the yearly NFP average was around 327K.  

Therefore, yes, seeing a softer NFP figure, falling wages growth and higher unemployment ideally with a higher participation rate is what the Federal Reserve (Fed) needs to pause hiking. But the loosening in the US jobs market hasn’t materialized just yet.  

ISM in the red. 

Yesterday’s strong ADP report was accompanied by a set of soft ISM figures. The ISM manufacturing PMI showed fastening contraction and more rapidly falling new orders in May, although the employment remained in the expansion zone (!)… As such, the third day retreat in the US 2-year yield to around 4.35% was certainly also driven by soft ISM figures – and not only by US debt ceiling resolution. Activity on Fed funds futures hints at an increased possibility of a rate hike skip at June meeting. The probability of a no rate hike is now at around 74%.  

The US dollar fell sharply yesterday, pushing the EURUSD back above the 23.6% retracement level on September to April rally. While I am not confident that we will see soft US jobs data, a softer-than-expected figure could encourage a further recovery.  

In the Eurozone, even though the latest inflation figures came in highly encouraging – with the CPI flash estimate falling to 6.1% versus 7% printed a month earlier and core CPI retreating to 5.3% - the European Central Bank (ECB) Chief Christine Lagarde didn’t see it as ‘evidence’ of peaking inflation and pledged to hike rates further. The decidedly hawkish ECB versus the rising voices hinting at a pause in Fed tightening in June could open an opportunity window for the EUR bulls to carry the pair back above the 200-DMA, which currently stands around the 1.0810 level.  

And beyond the Fed’s June meeting? Well, we will see. The Fed clearly sends a message that they no longer see urgency in hiking the rates, while also letting investors know that their job fighting inflation is not done just yet. That’s a way of managing market expectations: pausing rate hikes, without however letting the market conditions loosen due to excess dovish speculation. 

S&P500 and Russell 200 tell different stories. 

Optimism regarding the US debt ceiling deal, and the falling yields sent the S&P500 1% up yesterday, Nasdaq jumped around 1.30%.  

1. the US debt ceiling crisis led to an accidental liquidity support,  
2. the banking crisis increased haven flows to Big Tech companies,  
3. the AI-craze attracted big inflows to Big Tech and, 
4. softer US yields boosted the tech stock valuations.

As a result, Apple is up by around 45% since the start of the year, Alphabet rallied almost 50%, Microsoft and Amazon are both up by more than 50%, while Tesla more than doubled its price and Meta made an impressive U-turn. The stock price is up by 124% since the start of this year and more than 200% since the November dip. I am saying this because, as a result, the major US indices have been extremely biased by the Big Tech rally since the beginning of the year.  

But without their contribution, the S&P500 would be up by just around 1.5% and would be much more vulnerable to … the tightening credit conditions, for example, due to the banking stress.  

And if we compare the S&P500 to Russell 2000, we could clearly see that the recovery following the bank-stress selloff hasn’t been on the menu for small US stocks. On the contrary, the Russell 2000 index recorded a nice rally in tandem with the S&P500 stocks until the bank crisis, sold off along with the big stocks during the bank stress, but never recovered since then. The latter is proof that investors could be blindsided regarding the health of the US economy, if they only relied on the dynamics of the major US indices.  

In this respect, Macy’s was one of the latest US retailers to release results yesterday, and the results were mixed. Sales tumbled below pre-pandemic levels and the company lowered its yearly forecast. However, Macy’s beat profit expectations, which helped the stock to recover from an initial 12% slump. But profits fell from $286 mio to $155 mio compared to a year earlier. So, it was a profit beat, yes, but on profits that almost halved in a year!