To explain the performance of US equities yesterday, let’s start by recalling, once again, what constitutes this best-case scenario for investors. Basically, inflation is still there, but not too much. Economic activity is suffering, but not too much. There are financial disorders, but not too many. As a result, the US Fed, which is rather pro-business, has no choice but to stop raising rates, or even to start lowering them before the situation becomes critical, in order to revive the economy. Hopefully, inflation will run away on its own at some point and the domino game of bank failures is over.

This little tune has carried the markets for several weeks. However, some developments just put a damper on this scenario. First, OPEC+'s decision to cut production by 1m barrels a day had the effect of strengthening oil prices. This unexpected move by the cartel may have implications not only for consumer prices but also for social discontent in Western countries, where the cost of petrol is always a politically sensitive issue. The second hitch is the deterioration of US macroeconomic data. As I wrote earlier, the market is expecting economic data that is neither too good or too bad. However, manufacturing activity indicators are in the red and we know since yesterday that the labor market is starting to tighten, with job offers hitting a two-year low.

If investors were really rational, they would be happy to see that the labor market is starting to show signs of weakness, as this is probably the statistic that the Fed looks at the most, along with price developments, to determine its monetary policy. Strategists at the big Wall Street banks often repeat that the famous "pivot" in the Fed's monetary policy depends on employment. But yesterday, it is fair to say that the fear of a hard landing for the economy has overtaken hopes that rates will fall again. It is far too early to draw conclusions, but it is a point of caution. Swaps in the interest rate market show that the majority of investors (58%) are now betting on a status quo and not on a 25 basis point rate hike at the Fed meeting on May 3. Well, that's a month away, so there will be a lot happening between now and then, but it gives an idea of the mood. The prevailing forecast is that the US central bank will cut rates by 75 basis points by the end of the year. There is a big gap between this view and that of the Fed, which is trying to send the message that there will be no rate cuts in 2023. To refine the probabilities, there are two dates to remember: Friday for the monthly US employment statistics and April 12 for March inflation.

Yesterday, the Nasdaq 100 fell 0.4% and the S&P500 about 0.6%. At the same time, the dollar hit a two-month low against the major currencies, gold jumped to USD 2022 per ounce and bond yields continued to erode. All this is rather consistent with a weakening US economy and a monetary policy that is tending to loosen, but as you can see, since yesterday, investors have become a little more concerned about the firmness of the economic landing.

And today’s data only added fuel to the fire, since it showed weaker-than-expected growth in private payrolls in March. U.S. stock index futures were in the red today after the ADP National Employment report revealed that U.S. private employment rose by 145,000 jobs last month, while 200,000 were expected.

 

Economic highlights of the day:

The day is devoted to the final PMI indicators in services across the major economies, as well as the ADP report on employment, the ISM services report, and the DOE's crude oil inventories. All the agenda is here. 

The dollar is flat at EUR 0.9127 and GBP 0.8007. The ounce of gold breaks through the USD 2,000 barrier at USD 2,030. Oil is slightly down, with North Sea Brent at USD 84.71 per barrel and US WTI light crude at USD 80.51. The yield on US 10-year debt fell to 3.35%. Bitcoin is trading around USD 28,500.

 

In corporate news:

  • Johnson & Johnson announced that it has agreed to pay 8.9 billion to settle tens of thousands of lawsuits over talc in its products suspected of being carcinogenic. The pharmaceutical group was up 3% in pre-market trading. 
  • Exxon Mobil said in a Tuesday filing that its first-quarter operating profit fell about 25 percent from last year's record level, due to lower oil and gas prices.
  • Alphabet - Google said the supercomputers it uses to train its artificial intelligence models were faster and more energy efficient than comparable power-efficient systems from Nvidia. The latter was down slightly in pre-market trading. 
  • Walmart announced that it expects about 65% of its stores to be automated by the end of its 2026 fiscal year.

 

Analyst recommendations:

  • BP Plc: Goldman Sachs remains Buy with a price target reduced from £740 to £710.
  • ConocoPhillips: Societe Generale raised its recommendation to hold from sell. PT down 1.2% to $105.
  • Dover: Baptista Research initiated coverage with a recommendation of hold. PT set to $165.
  • Drax: Jefferies remains Buy with a price target reduced from £800 to £700.
  • J.B. Hunt: Baptista Research initiated coverage with a recommendation of hold. PT set to $187.40.
  • Just Group: Jefferies remains Buy with a price target raised from £120 to £140.
  • Masco: Baptista Research initiated coverage with a recommendation of hold. PT set to $51.40.
  • On Holding: Baird downgrades to neutral from outperform. PT up 1.5% to $33.
  • Pegasystems: Baptista Research initiated coverage with a recommendation of hold. PT up 10% to $52.50.
  • United Community Banks: Stephens reinstated coverage with a recommendation of overweight. PT set to $34, a 23% increase from last price.