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Morning Bid: Fed in a bind as consumers stay upbeat

[May 29, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

World markets wobbled on Tuesday, with benchmark bond yields and volatility gauges jumping to their highest in almost four weeks, as more evidence of the stoic U.S. consumer alongside runaway tech stocks leaves the Federal Reserve with a conundrum.

Also agitated by Tuesday's whopping $297 billion sale of Treasury notes and bills and a tepid investor response, 10-year benchmark yields hit their highest level since May 3. The VIX also jumped to near four week highs and the dollar firmed, especially on the yuan and euro.

The rates market angst began with the latest readout on resilient U.S. households however. Confounding expectations of a slowdown this month, the Conference Board's monthly survey showed consumer confidence pushed higher again in May.

Even though the survey revealed some anxiety about possible recession ahead, the surprising optimism centred on two main things. The first is plentiful jobs, as the unemployment rate has now stayed below 4% for 26 consecutive months, and rising stock markets.

The survey's net reading of those who expect stock prices to keep rising over the next 12 months over those who see it falling is at its highest since 2018 - and may well be flattering the view of household finances and spending plans.

And that tallies with Chicago Fed's national financial conditions index at its loosest setting since late 2021 - four months before the Fed starting tightening policy in March 2022.

Although futures have dialed back about half a percent before Wednesday's open, the S&P500 is some 10% above the pre-Fed tightening peaks.

And led by another 6% surge on Tuesday in artificial intelligence torchbearer Nvidia, the Nasdaq crossed 17,000 for the first time ever.

Nvidia's latest leap put the AI chipmaker's market value at $2.8 trillion - leaving the world's third biggest company just $100 billion shy of Apple.

The question for the Fed in all of this is whether the rising stock market is undermining its credit market tightening, despite benchmark borrowing and long-term mortgage rates being at their highest in a decade.

If consumers feel their finances are rising anyway, it may struggle to get inflation back into its 2% box.

Higher oil prices ahead of the weekend OPEC meeting won't help.

Sticky inflation was also in evidence overseas, with Australian consumer prices gains unexpectedly picking up to a five-month high at 3.6% in April.

There was better news for the European Central Bank, now widely expected to cut its interest rates as soon as June.

Although annual rates of inflation in German states picked up in May, monthly rates mostly flatlined and banks increased their loans to companies by just 0.3% year-on-year in April, slower that the prior month.

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The Federal Reserve building stands in Washington April 3, 2012. REUTERS/Joshua Roberts/File Photo

In Asia, Japan warned of possible rate hikes to support the yen and China's yuan and stocks underperformed.

China's economy is set to grow 5% this year and in line with Beijing's target after a "strong" first quarter, the International Monetary Fund said on Wednesday. But it added that it expects slower growth in the years ahead.

A busy summer of elections around the world kicked off with South Africans voting on Wednesday in a poll that could see the governing African National Congress lose its majority after 30 years in power. The rand edged higher into the vote.

In busy dealmaking, BHP asked for more time to try to win over takeover target Anglo American, hours before a deadline for the world's biggest miner to firm up its $49 billion offer. Anglo has rejected three proposals from BHP but last week agreed to a one-week extension to a deadline from the UK takeover watchdog for BHP to make a formal move or walk away.

Energy markets were also abuzz. ConocoPhillips is in advanced talks to buy Marathon Oil in an all-stock deal that could value the Houston-based company at a little over its $15 billion market value, the Financial Times reported on Wednesday.

Hess shareholders on Tuesday approved the proposed $53 billion merger with Chevron that paves the way for the No. 2 U.S. oil company to gain a prize asset and a foothold in rival Exxon Mobil's massive Guyana discoveries.

And shares of the UK Royal Mail's parent company International Distributions Services jumped 3.4% as it agreed to a 3.57 billion pound formal takeover offer by Czech billionaire Daniel Kretinsky.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* Dallas Fed's May service sector survey, Richmond Fed may business survey

* Federal Reserve releases Beige Book of economic conditions; New York Fed President John Williams and Atlanta Fed chief Raphael Bostic speak

* US Treasury sells 7-year notes, 2-year floating rate notes

* US corporate earnings: Salesforce, HP, Agilent Technologies

* South African National Assembly Election

(By Mike Dolan; Editing by Toby Chopra)

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