Mixed European shares; strong Japanese GDP 

European shares were a mixed bag in early trade on Thursday with the major indices all looking fairly contained. The FTSE 100 ticked up a bit to 7,636 as oil prices rose, whilst the DAX shed a fifth of a percent to 15,919. The Nikkei 225 led losses in Asia despite Japanese GDP grew at an annualised rate of 2.7% in the first quarter, well ahead of the +1.6% estimate. China’s state-owned commercial banks cut their deposit rates, potentially signalling the PBOC is about to cut too to boost the economy – reopening has not been all it was cracked up to be.   

US Stumbles 

Wall Street finished lower on Wednesday, led by declines for big tech as the momentum behind the rally to a 9-month high faded – maybe profit taking, maybe concerns about yields and the Fed as the 10yr ticked up. Amazon, Alphabet and Microsoft fell 3-4%, whilst yields climbed higher. The US 10yr Treasury yield rose above 3.81%, threatening to break out above its late May peak – a move here could drive a deeper pullback; $1tn of Treasury issuance coming down the pipe may be a catalyst. But so far there is not a lot of worry - the Vix touched 13.77 on Wednesday, the lowest since the ‘fear gauge’ hit an intraday low of 13.38 in Feb 2020, a month before Covid struck. The S&P 500 dropped 0.38% to close at 4,267.52, while the tech-heavy Nasdaq Composite declined 1.29% to 13,104.89. Looking deeper we see the Russell 2000 has outperformed the S&P 500 by five percentage points in the last 5 sessions after two monster days that have taken it back to the highest since early March....new leadership for the rally? Meanwhile the Regional Banking ETF (KRE) finished above its 50-day SMA for a third day in a row (h/t Bespoke).  

BoC hikes on the table 

Bank of Canada hiked rates and said more may be needed – again some think it was a surprise but really it was always on the cards. Is there a read across for the Fed next week? Perhaps...the BoC has been in front of the Fed and this move – coming after it paused its hiking cycle earlier in the year – suggests the Fed may opt to ‘skip’, a narrative officials have been leaning into lately based on their comments.  

Play, pause or skip? 

Next week the Fed can hike by 25bps and either signal more to come (strong hawkish) or that this is the end for now (dovish hike); it can pause, and signal it will wait on the incoming data further (soft dovish); or it skips – holds but signals it may raise rates in July (hawkish hold). Over the last month markets have generally been pricing in a roughly one-in-four chance it hikes; it’s now up to one in three. It’s all about cutting the engines and letting the super tanker drift into harbour without crashing the boat and the pier. A lot will depend on the previous day’s CPI inflation data; we know the labour market remains robust, albeit business surveys point to a marked slowdown and recessionary indicators are flashing. I’ve always thought that the Fed is not done and may need to go to 6% unless there is a sudden reversal in core inflation and the labour market weakens materially over the summer. Whether that means the Fed hikes next week or not is unclear – but I bet Powell still fancies himself as Volcker and his bias is to keep going a bit longer – so long as core inflation is high.  

All for AI say aye 

Back in the real world, Citadel founder and CEO Ken Griffin had some sage words about AI, saying it’s not there yet. “I do think the AI community is making a terrible mistake by being full of hype on the near-term implications of generative AI,” he said. “If you listen to the CEOs of tech companies, it’s going to eliminate millions of white-collar jobs,” Griffin added. “I say, ‘Not that fast.’ Some professions are accepting of errors, but you have to be really accurate in finance. You have to be really accurate as a lawyer.” I think he meant ‘supposed’ to be really accurate...  

Elsewhere, gold – 100-day line and 50% retracement offering support, but yields are surely set to rise?