Fiscal Worries Persist Ahead Of Flash PMIs

WHERE WE STAND – When arguably the most interesting thing that happened during the day yesterday was everyone’s Bloomberg Terminals experiencing an incredibly rare outage, that probably tells you all you need to know about how light both the news- and data-flow proved to be.

Still, bloomie’s now back, the rain in London has stopped, and all seems right in the world once more.

Equity bulls, though, might not share those sentiments, at least those operating over shorter time horizons, with yesterday marking a second straight daily decline for the S&P, for the first time in a fortnight. I can’t say that I’m especially concerned here, though, about my bullish stance, with this seemingly more a sign of the market suffering from a touch of exhaustion, as opposed to being the beginning of a change in the longer-running trend.

Peak trade uncertainty remains in the rear view mirror, incoming data remains resilient for the time being, with incoming earnings also not as bad as had been feared. Hence, I remain comfortable to sit here in ‘dip buying’ mode, with 6,000 and then fresh highs being the upside targets. That said, I’d imagine that the risk of Nvidia (NVDA) earnings next Wednesday is starting to play on a few minds, and wouldn’t rule out the chance of a bit more de-risking into that report. You’d imagine, though, that the 100- and 200-day moving averages, around 5800 in spoos, should be the limit of any declines, if we even get that far.

Meanwhile, Treasuries also traded softer across the curve, with there being no stopping the bear steepener for the time being, as fiscal jitters persist, and with bond bears yesterday having been further egged on after a weak 20-year sale – not that they needed much more by way of encouragement! That selling pressure, though, took benchmark 30-year yields north of 5.05%, to the highest levels since November 2023, with this being a move that’s tough to stand in the way of right now.

I still think we’re a fair way off a level that would extract a policy pivot out of the Trump Admin, but also still think that we trade 4.50% on 30s before we touch 5.50%. I suppose the message here is that, while the steepener has room to run for now, that room might well be running out.

The broader problem here, however, as I was discussing with some clients yesterday, is one that is common across DM when it comes to dealing with ballooning budget deficits. The short-term nature of politics and electioneering discourages anyone from making the tough and unpalatable choices needed to put the fiscal backdrop on a more sustainable footing, while there is also little incentive to do so as, while DM nations can borrow with ease, they’ll continue to spend with the same ease too. It’s not a subject for this morning, but I do wonder at what point that last factor changes, and how close to that point we could be.

Outside of all that, I also want to touch on yesterday’s UK CPI figures, which were considerably hotter than expected. Headline prices rose 3.5% YoY last month, the fastest pace since last January, while the closely-watched services CPI metric shot higher by 5.4% YoY, the fastest pace since last summer.

Figures of that ilk, quite clearly, mark the final nail in the coffin of the idea that the BoE will deliver a cut next month, though they are also skewed higher by numerous one-off factors – higher energy costs, the annual round of index-linked price increases, and a survey date close to Easter putting upward pressure on accommodation and travel prices. This rise in inflation, particularly given the dismal macro backdrop of a loosening labour market and anaemic pace of underlying economic growth, seems highly unlikely to prove persistent, fading by the end of summer. Furthermore, in light of those two factors, I still see the BoE’s ‘gradual and careful’ guidance as being on borrowed time, and a pivot to a faster pace of easing being almost inevitable in the last few months of the year.

Anyway, cable briefly printed fresh YTD highs in the aftermath of the CPI figures before those gains fizzled out, albeit against a backdrop of a dollar which traded broadly weaker against most peers. In fact that weakness sees the DXY trade back beneath the 100 figure, though so long as we remain above recent lows around the 99 handle, I’m not overly keen to shift from my dip buying stance.

LOOK AHEAD – The busiest day of the week lies ahead; I’ll let you decide whether that’s a blessing or a curse.

It’s ‘flash’ PMI day across the globe today, those love them or hate them surveys which, supposedly, give us an up-to-date indication of how the economy is performing. By and large, across all locales and sectors, we should see a tick higher compared to the April prints, largely a result of the alleviation of a huge degree of tariff uncertainty since the ‘Liberation Day’ measures were rolled back, and the US-China trade truce was agreed. Still, the signal this data provides is questionable, in my mind.

Away from that, we have a few other bits and bobs to deal with. The latest IFO sentiment surveys are due from Germany, while minutes from the April ECB meeting are also set to be released, and should send us all to sleep pretty quickly.

Stateside, the weekly jobless claims figures are due, with the initial claims print pertaining to the May nonfarm payrolls survey week, while we’ll also relieve the latest existing home sales report, plus remarks from a handful of Fed speakers.

Of more importance than all that, though, today marks the start of the first test of the summer – safe to say I’m much more confident in our chances vs. Zimbabwe, than against the might of India later in the year.