European stock markets rose a little early on Tuesday after a tough session for risk in the wake of the European Parliament elections. French-German bond spreads hit the widest this year on rising fiscal and political risk premia; far-right done good = fragmentation tail risks, policymaking trade-offs and inertia, lower immigration, higher fiscal deficits, and protectionism. I think you get the higher spending anyway – deficits are not coming down – and protectionism is what the EU is all about. We talked about some of this yesterday.
Higher for longer? UK wage growth remained steady at +6.0% - not necessarily going to change things for the Bank of England as it knows that headline inflation is coming down and there will eventually be a moderation in pay growth. Remember rising real wages are exactly what we do want. The worry is that the BoE stays too high for too long because it is looking at the lagging wage data rather than the weakening labour market with unemployment unexpectedly jumping to a two-year high of 4.4%. It was the biggest monthly jump since the GFC, outside of the Covid era. Markets think this makes a cut by August more likely. I fail to see any reason for the Bank to be holding off any longer – time to take a leaf out of the ECB playbook. GBP/USD was reasonably steady after a bit of a move lower on Monday was recovered and we are back to the lows from Friday in the wake of the NFP report.
The S&P 500 and Nasdaq Composite both hit record highs again yesterday. BofA tactical call after the all-time high last week: “The A-D line, 5-day put/call ratio, the US high yield OAS, the Corporate BAA spread, and new 52-week highs did not confirm this new high on the SPX. These negative divergences are a tactical risk for US equities in June. SPX supports are 5191 and 5000-4953.”
Fed day tomorrow – watch the dot plot. In March it signalled three rate cuts this year. By tomorrow it could be down to one. I think it comes down to a case of delaying the cuts rather than raising the neutral rate (that may come later). The NFP data on Friday was suspect. I think they are viewing slowing economic growth and higher unemployment is what they are looking at now – unemployment has risen from 3.4% to 4.0%. Q1 GDP revisions were not great, consumer spending down, and Q2 is not shooting the lights out. The NFP data was a bit of a red herring – the case for cutting is building. The Fed wants to stay ahead of the curve this time and the easing bias remains. Remember inflation = good for the deficit.
Apple (NASDAQ:AAPL) is partnering with OpenAI to roll out AI in its phones. At its annual developers conference, the company said it will integrate ChatGPT to roll out ‘Apple Intelligence’ in its iPhones. Will this spark a fresh upgrade cycle? IT seems to answer worries about whether Apple was keeping up with the Jones in terms of AI. Market reaction was modest – shares declined 2% yesterday and extended lower in after-hours trading. Its forward PE has been higher than the SPX and NDX for a couple of years now and the market seems to think that it has the ability to execute on a lot of different fronts – shares in that time have not done much.
Tesla (NASDAQ:TSLA) shares were also off 2% as investors fret over Musk’s future. Shareholders need to vote on his $56bn pay deal on June 13th. Seems to be a big ‘no’ group building will be hard to pass with several big shareholders coming out against the deal. Musk has dangled a rather sticky-looking carrot by implying he won’t apply himself to running Tesla if he doesn’t get the cash, instead prioritising other businesses he runs. It’s likely a case of the big funds saying no and all a lot of retail saying yes – the question is whether the retail investors actually vote.
EUR/USD: The euro couldn’t rally yesterday as bond spreads widened and the market looked to a possible win by RN in France. ECB president Christine Lagarde wants more data – negotiated wages, productivity and unit labour costs all due ahead of the Sep meeting will be crucial. 