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Greener Pastures 

Risk bid at the open in Europe after a potential breakout session on Wall Street. The FTSE 100 put on 0.4% to rally above 7,750, whilst the DAX added more than 1% to 16,150, its highest since January 2022. Small caps led the gains in the US with the Russell 2k up more than 2% to close above its 50-day SMA for first time since March 8th, with the other three major indices up more than 1%. NDX made a fresh high, SPX broke above 4,150 just. Yields are firmer with the 10yr Treasury touching 3.58% and the dollar is also up trying to recapture the 6-week high struck yesterday. Oil holds gains after yesterday’s rally, copper a touch lower following a big up day yesterday.  

 

Debt and Inflation 

Debt ceiling talks make progress – Republican congressional leader McCarthy: "It is possible to get a deal by the end of the week … It's not that difficult to get to an agreement." Undoubtedly a deal would be good, but what about the amount of issuance that would lead to de facto tightening?  

Across the pond, Andrew Bailey, the governor of the Bank of England, finally admitted that the UK is suffering from a wage price spiral. As I have said consistently, the same people who told you inflation would be transitory were telling you there was no danger of wage price spirals. He also sought to ‘push back’ against the idea that loose monetary was to blame for some of the inflation we have…They are not fit for purpose. Bailey speaks in front of the Treasury select committee later. Cable is steady at the 1.2450 area after rejection of 1.2420 yesterday but bears still in charge. 

Finally, Eurozone inflation data accelerated last month, hitting 7.0% in April from 6.9% a month earlier. Core slowed a touch to 7.3% from 7.5%. US unemployment claims today fc at +253k, with the Philly Fed seen at -19.5. Slew of Fed speakers plus US existing homes data. 

 

Telecommunications Suffering 

Just how bad is it for telcos? Vodafone said it would cut 11k jobs – more than a tenth of its workforce. Now BT say it will cut 40% of its workforce by 2030. Maybe it’s AI, maybe it’s just plain necessary. Either way being a distributor of data is not working out. Legacy infrastructure owners have it bad – they never moved quickly enough when mobile data went big. BT shares fell more 8% as final results which showed revenues down 1% and reported profit before tax down 12%. 

 

Comments from the Banking Sector 

JPMorgan Asset Management says markets are right to price in rate cuts ...thinks recession is coming. The question here is the type – a recession-lite with weak/contraction in nominal GDP whilst the labour market remains buoyant is not the same as a full-blown recession. I don’t see how the Fed cuts this year….as long as people have jobs they will spend. 

Additionally, GS remarked on the potential for AI moving forward: “...Artificial intelligence represents the biggest potential long-term support for profit margins. Our economists' productivity estimates suggest AI could boost net margins by nearly 400 bp over a decade.” 

 

Notable Movers 

Aston Martin – up 20% on partnership with Geely, which is doubling its shareholding to 17%. EasyJet – narrows losses with good summer bookings. Revenues for the 6 months to the end of March were up 80%. Burberry down 7%, China reopening good, American sales weaker.  

Target – revenues flat on the year – consumers are dialling back discretionary spending (cf Home Depot). Organised crime mentioned as a big drag... It’s insane that crime is causing such a huge hit to cash flow...we see the videos on social media showing some folks helping themselves to whatever they like. Maybe it’s really widespread...hard to say when it’s never been mentioned before. Walmart reports today.  

Lastly, the ‘deposit flight’ seems to be overblown. Western Alliance popped 10% premarket after it said its deposit growth for the current quarter exceeded $2 billion as of May 12th. 

 

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