May 23, 2023
Daily Market Commentary
- The number of fires burning in Canada’s top energy-producing province of Alberta declined over the weekend, and cooler temperatures and rain in the days ahead are expected to provide further relief. Alberta had 81 fires, 23 of them out of control, as of Monday afternoon, Christie Tucker, a spokesperson for Alberta Wildfire, said at a briefing. That’s down from 93 fires, including 26 out of control, on Friday afternoon. The rash of infernos that began earlier this month have shut about a fifth of Canada’s natural gas production at times and prompted the evacuation of about 40,000 residents.
- Surging demand for air travel, particularly in business and first class, is set to continue, keeping ticket prices elevated, according to a senior Air Canada executive. “Business class and premium economy for Air Canada recovered more quickly than economy,” Mark Nasr, the airline’s vice president, marketing and digital, said in an interview in Tokyo on Tuesday. “We are now seeing demand structurally higher in the premium cabins than it was prior to the pandemic,” as people splurge on special events like weddings and family reunions, he said. Strong advanced bookings, limited capacity and higher fuel prices will underpin high fares, with the airline “seeing a favorable yield environment,” Nasr said. “We will always remain competitive with the market. We believe we are currently competitive as well on the pricing side and of course from the product side.”
- European stocks slipped as data painted a mixed picture of economic growth, while traders continue to track US debt-ceiling negotiations aimed at averting a catastrophic default. The Stoxx 600 was down 0.3% at 10:17 a.m. in London, with consumer products and retail stocks leading the declines. Luxury-goods makers Hermes International and LVMH slumped as Deutsche Bank analysts said they expect investors to become more selective going forward as the sector is crowded and valuations are lofty. A 10% year-to-date rally in European stocks has moderated this month as worries about slowing economic growth and the lack of a resolution in the debt-ceiling talks have kept investors from making big bets. While the benchmark Stoxx 600 is hovering near its highest level since February 2022, the index has now failed to move 1% in either direction for over two weeks.
- Treasuries dropped across the curve, with the two-year yield rising for an eighth day, after another round of debt-ceiling talks ended without a deal. Investors have been demanding higher premiums to hold US debt, especially those at the highest risk of default, with little time left for politicians to avert a catastrophic US default. Yields on four-week Treasury bills hovered at 5.47% on Tuesday, bringing their rise since the beginning of May to more than 60 basis points. US equity futures were little changed after a lackluster day on Wall Street. President Joe Biden and House Speaker Kevin McCarthy called their discussions on Monday productive, but an agreement remains elusive. That left traders on tenterhooks with only a few days left before June 1, when Treasury Secretary Janet Yellen said her department may run out of cash. Any deal would have to be approved by Congress before then.
- Asian stocks fell, with Chinese benchmarks underperforming as geopolitical tensions resurfaced, while Japanese shares halted a rally. The MSCI Asia Pacific Index erased an earlier gain to fall as much as 0.5%, led lower by Toyota and Tencent. Benchmarks in Hong Kong and mainland China lost more than 1% each, with the main CSI 300 Index close to wiping out all its gains for the year as foreigners sold more than $1 billion. Japanese stocks reversed gains as news about stricter export controls on chip technology hurt sentiment. That likely also weighed on China markets as the foreign ministry said the government “firmly opposes” Japan’s decision.
- Oil fluctuated as traders weighed an unresolved US debt-limit and mostly shrugged off a warning by Saudi Energy Minister Prince Abdulaziz bin Salman to short-sellers. West Texas Intermediate for July traded near $72 a barrel after that contract added 0.5% on Monday. US House Speaker Kevin McCarthy said he and President Joe Biden had a productive talk, although a deal to avert a default has yet to be struck. Before the meeting, Treasury Secretary Janet Yellen had warned it was now highly likely her department would run out of sufficient cash in early June. Brent and West Texas Intermediate futures briefly ticked up by about 20 cents, but both gave up those small gains and are down on the day. OPEC and its allies will meet on June 3-4 in Vienna to review production policy for the second half of the year.
- Gold fell for a second day amid optimism that US policy-makers will reach a deal to raise the federal debt ceiling and avoid a default. While President Joe Biden and House Speaker Kevin McCarthy remained without an agreement on the debt limit Monday night after another round of talks, they called their discussions productive and vowed to keep negotiating. The threat of a potential default boosted demand for havens, helping to send gold to the highest in a year earlier in May. But bullion has dropped 5% since then and is hovering above the lowest level since early April. Spot gold fell 0.6% to $1,959.90 an ounce as of 10:01 a.m. in London. The Bloomberg Dollar Spot Index was steady. Silver, palladium and platinum all declined.
- Apple Inc. and Ireland hit back at the European Union’s antitrust watchdog in a €13 billion ($14 billion) court clash that may help to define the legacy of Competition Commissioner Margrethe Vestager. At an appeal hearing at the EU’s Court of Justice, Apple said Vestager’s team made legal errors when they concluded the iPhone maker was given vast amounts of unfair tax aid from Ireland and issued an order to repay the money. The European Commission is in court to contest a painful setback at a lower tribunal in 2020 over its record bill for Apple, levied in 2016. The case is a crucial test of Vestager’s ongoing crackdown on sweetheart tax deals for multinational firms. The top EU court’s binding ruling will help determine the course the commission can take as it’s vowed to keep up chasing unfair tax deals during Vestager’s tenure, which comes to an end next year.
- President Joe Biden and House Speaker Kevin McCarthy remained without a deal on the debt limit Monday night after another round of talks, though they called their discussions productive and vowed to keep negotiating to avert a catastrophic US default. The two met at the White House for more than an hour Monday evening in Washington. Earlier, Treasury Secretary Janet Yellen warned it’s “highly likely” her department would run out of sufficient cash in early June and that default could come as soon as June 1. “The tone tonight was better than any other time we have had discussions,” McCarthy told reporters as he emerged from his meeting with the president. The two leaders, he said, “had a productive discussion. We don’t have an agreement yet.”
- Federal Reserve policymakers are increasingly grappling with a critical question: How much should they weigh the adverse impact of their interest-rate hikes on banks against the goal of containing the fastest price increases in decades? The answer will play a major role in determining whether the Fed is steadfast in keeping rates elevated through year-end as officials expect, or cuts them as traders are betting. Since US banking turmoil flared in March, the Fed has raised interest rates twice to combat inflation while pumping emergency liquidity into the banking system — discrete actions that underscore officials’ long-standing habit of keeping financial-stability actions apart from monetary policy. The strategy — known as the separation principle — is being tested, as credit-crunch aftershocks threaten to toss the economy into a hard downturn before the Fed has contained price pressures.
- Lowe’s Cos. cut its sales outlook for the year a week after rival Home Depot Inc., citing a slowdown in consumer spending. The company now expects comparable sales to drop as much as 4% this fiscal year, it said in a statement. In March, Lowe’s predicted sales by that measure might be flat or decline as much as 2%. Lowe’s blamed falling lumber prices, unfavorable weather and lower consumer spending on DIY and other discretionary items for declining sales. Home Depot last week cut its full-year outlook and noted a “broad-based pullback” in consumer spending.
- China’s move to ban Micron Technology Inc.’s products marked its most meaningful retaliation yet against US export controls. Now the question is whether President Xi Jinping will go after even bigger targets, risking blowback to his own economy. Until this week, Beijing hadn’t responded in kind to US moves to kneecap China’s access to advanced chips and other technology, which President Joe Biden has said could be used for military modernization. China has repeatedly blasted the actions as the “long-arm” of US hegemony, while taking few meaningful actions against American companies. The Micron decision, coming shortly after Group of Seven leaders published a communique vowing to counter Beijing’s “economic coercion,” appears to mark a shift in thinking. The action may lead to material damage to a firm that gets 11% of its revenue from China, according to data compiled by Bloomberg.
- Dick’s Sporting Goods Inc. jumped after reporting profit that surpassed Wall Street’s expectations, a sign the athletic retailer is maintaining its momentum despite consumers’ broader pullback from discretionary spending. Adjusted earnings of $3.40 a share in the fiscal first quarter ended April 29 exceeded the average analyst estimate of $3.13. Revenue was in line with expectations. Chief Executive Officer Lauren Hobart said Dick’s is gaining market share and that the number of transactions increased in the period. “Even as consumers face macroeconomic uncertainties, our athletes have continued to prioritize sport,” she said in the company’s quarterly statement.
- Britain’s inflation rate is likely to fall at the sharpest pace in more than 30 years when April figures are reported on Wednesday, giving households a glimmer of relief from the worst cost-of-living squeeze in generations. The Consumer Prices Index is expected to tumble to 8.2% last month from 10.1% in March, according to a Bloomberg survey of economists. The drop is due to sharp increases in energy prices a year ago falling out of the comparison. While the forecast is more sunny than in previous months, the actual figures reported have surprised on the upside in the past two months. It’s a crucial set of figures that are hotly anticipated by the Bank of England and investors and will test bets on policy makers lifting interest rates to as high as 5%.
- Germany plans to buy 18 battle tanks and 12 self-propelled howitzers from domestic manufacturers Rheinmetall AG and Krauss-Maffei Wegmann GmbH as part of an order worth a total of €843 million ($910 million) to replace equipment sent to Ukraine. The purchase, which also includes spare parts, is expected to be approved by the budget committee in the lower house of the German parliament on Wednesday, according to people familiar with the matter and defense ministry documents obtained by Bloomberg. A spokeswoman for the defense ministry confirmed that the purchase plan to replace the Leopard 2 tanks was forwarded to the budget committee, declining to comment further. Rheinmetall referred queries to Krauss-Maffei Wegmann, which in turn didn’t respond to a request for comment.
- Toyota Motor Corp. tumbled in the final minute of trading amid a downturn in the broader Japanese stock market on Tuesday. The stock closed 4.8% lower, its biggest decline since March 2022, shaving about $11 billion from the carmaker’s market value. The benchmark Topix closed 0.7% lower, erasing a gain in afternoon trading as news about Japan’s restrictions on chip-technology exports spurred profit taking. The world’s No. 1 carmaker earlier this month released a conservative profit forecast for the current fiscal year that aligned with analyst projections, as new Chief Executive Officer Koji Sato seeks to deliver on his pledge to rapidly expand electric vehicle production.
- Alibaba Group Holding Ltd.’s cloud division has begun a round of job cuts that could reduce its staff by about 7%, part of an overhaul aimed at preparing the once fast-growing unit for a spinoff and eventual IPO. China’s largest cloud service has begun informing affected staff, people familiar with the matter said. It’s offering severance to employees or transfers to other parts of the Alibaba empire, though those aren’t guaranteed, one of the people said. The moves are intended to streamline the business, which Alibaba aims to fully carve out into a separate company within a year, the person said, asking to remain anonymous discussing internal plans. Alibaba Cloud is one of the biggest companies that will be created in a six-way split of the parent, joining other units such as the Cainiao logistics division and international commerce in pursuing independent fundraising and potential listings. The group, which doesn’t detail staffing at separate units, employed more than 235,000 people as of March.
- The Federal Reserve needs to cool off the overheated labor market to tame inflation, though it’s not clear how far unemployment must rise to achieve that, according to former Fed Chair Ben Bernanke and ex-International Monetary Fund Chief economist Olivier Blanchard. While a steep run-up in goods prices was the main impetus to the surge in inflation over the last 2 1/2 years, the impact of a “very tight” job market is growing and is likely to prove more persistent, they wrote in a paper to be presented at the Brookings Institution on Tuesday. US unemployment fell to a multi-decade low of 3.4% in April from 3.5% in March, while payroll growth picked up to 253,000 from 165,000. Inflation, meanwhile, is more than double the Fed’s 2% target.