LD Macro Weekly Report (2023/05/29)

TLDR：

Market Summary: The debt ceiling crisis continued to plague markets at the start of the week, however, notable progress was made in the second half of the week. Nvidia's better-than-expected profit report triggered the market's pursuit of core technologies such as "AI" and chips, which led to a sharp rise in US stocks. Meanwhile, defensive targets fell as funds focused on the technology sector.

Economic indicators: PMI; data show; 5; the economy diverged, the service industry continued to be strong, and the manufacturing industry rebounded. Durable goods sales data and "PCE" reflect that inflation is still stubborn and the economy is still strong, leading to "June" interest rate hike expectations jumped, and interest rate cut expectations disappeared during the year.

Cryptocurrency market: Driven by extreme optimism in the technology sector, the cryptocurrency market also rebounded. However, the rise in expectations of the end of the interest rate coupled with the "TGA" expectation of extracting market liquidity has set a resistance to the persistence of its rebound.

Debt Ceiling Negotiations: U.S. President Joe Biden and House Speaker McCarthy reached a budget agreement in principle to raise the debt ceiling for 19 months. The focus of the market has turned to whether the Senate and the House of Representatives will vote on Wednesday and Friday. As funds are expected to run out on Friday, the voting process should not be surprising.

Viewpoint: June to August is a critical time window, because the four major contradictions will become very obvious. The four major contradictions include the issuance of new treasury bonds, the extreme divergence of the stock market, the Fed's interest rate end point, and the strong attraction of fixed income to funds.

The development of AI; is expected to reduce investors' dependence on changes in interest rates, valuations are already expensive but still not outrageous, and there is still room for its bubble stage. The optimism is sure to spill over to the cryptocurrency market, as both have huge "adoption" potential unlike established industries, it's just liquidity and regulatory concerns hanging over the digital currency market that could limit its gains.

WEEK MARKET OVERVIEW:

With progress in talks to raise the U.S. debt ceiling and optimism about artificial intelligence, global stock markets diverged last week. fall.

In terms of U.S. stocks, AI is undoubtedly the hottest theme this week. The technology sector rose by more than 5%, communication rose by more than 1%, and the necessities and materials sectors led the decline, both falling by more than 3%. It shows that funds continue to flee defensive targets and instead invest in industries with higher growth potential.

Last week's strong economic data and hawkish comments from central bankers have sounded a wake-up call on interest rate expectations amid a realization that inflation will remain sticky for longer. This caused U.S. Treasury yields to continue to climb across the board:

l 30; The yield on the 1-year treasury bond hit the; 4%; mark, the highest level since the end of last year;

l The yield of 10-year treasury bonds rose from 3.66% to 3.81%; 2; 2-year treasury bonds rose from 4.24% to 4.57%; both refreshed the highest level since March this year;

l 1; Month and; 3; Month short-term bond yields fell slightly, showing that the market's concerns about the risk of the debt ceiling have declined.

In addition, U.S. crude oil rose 1.2%; to $72.67, mainly Oil producers last week released multiple conflicting messages about future supply adjustments.

Spot gold prices edged up 0.33% to $1,946.69 an ounce, mainly as the debt negotiation crisis continued to cool and bets on the Fed raising interest rates again reduced safe-haven demand for gold, and rising real interest rates were also bearish for gold This type of non-interest-bearing assets will theoretically put potential pressure on the price of BTC.

CFTC; Changes in futures positions:

In general, the net long position of U.S. stocks (Asset manager + Leveraged funds) rose slightly again last week, but the three major stock indexes diverged significantly. The net long position of Nasdaq increased to the highest level since the beginning of 2022; 500; net longs are down slightly. Russell; 2000; net-shorts have been reduced significantly and are now almost back to neutral. Such position changes are consistent with the spot market trend.

In the bond market, net short positions increased to near-record highs, with ;2;, ;5; and ;10; net shorts rising, while net shorts in ;30; fell. In FX markets, dollar net shorts fell slightly, largely due to a slight reduction in euro net longs.

Global Equity Fund Flows:

EPFR data: as of the 24th, the net inflow of global stock funds was still negative, this week was -4 billion US dollars, which was an improvement from last week's -8 billion US dollars. Developed-world equity funds dominated outflows, with U.S. equities seeing outflows for a sixth straight week, but at a sharply slower pace than the previous week. Emerging market equity funds also saw net outflows.

Debt Ceiling Negotiations:

U.S. President Joe Biden and House Speaker McCarthy reached a budget agreement in principle to raise the debt ceiling from 19 months to 1 year 2025. Because the agreement represents a compromise, and any compromise plan will almost certainly lose the opposition of the far left and far right, the focus of the market will turn to whether the Senate and House of Representatives will vote this week.

Leaders of both parties are currently very confident that the debt ceiling agreement will be passed. The bill needs to be passed by the House of Representatives; 218; votes in the Senate; 51; votes. President Joe Biden has strongly urged both houses of Congress to pass the U.S. debt deal immediately, and he does not foresee any potential disruption to the deal. McCarthy, for his part, claimed that "95 percent" of party lawmakers were "thrilled" with the deal, but acknowledged that the bill "didn't get everything that everyone wanted, but in a divided government, that's where we end up." .”

Yellen updated the date for the government to run out of funds to June; May; 5; (four days later than originally expected) and asked Congress to reach a negotiated result as soon as possible to avoid a debt default.

The Senate is expected to vote on the bill on Wednesday and the House of Representatives as early as Friday, because Friday is the last date for the Treasury Department to expect to run out of cash, so there is no room for error in this week's progress, although it seems that there may be surprises at present. Minor, but any surprise in the voting process that could push the bill's passing date past "X-Date" to next week would add to market uncertainty.

Important economic data last week:

The PCE price index and durable goods sales data released on Friday had the biggest impact, showing that inflation remains stubborn and the economy remains strong, raising expectations for a June rate hike.

April; month; PCE chain rose; 0.4%;, higher than expected; 0.3% and last month's 0.1%;. Year-on-year growth of 4.4%; also higher than the expected; 4.3% and last month's; 4.3%;. Excluding the core of food and energy, PCE; also rose 0.4%; higher than the expected; 0.3%;, also higher than the previous month; 0.3%;. The year-over-year increase was 4.7%, higher than the expected 4.6%; and last month's 4.6%;.

Clearly this data shows that inflation is still stubborn. Since December last year, the Fed has raised interest rates by 125 basis points, but the core PCE has not declined around 4.7%. This data further supports the Fed's expectation of further interest rate hikes in the future.

As soon as the actual data came out, CME's "interest rate futures" immediately priced the next "FOMC" meeting to raise interest rates; 70%; and last week only "17%"; Beginning to completely change expectations to continue raising interest rates.

There are still several important data in the future, including; May; non-agricultural employment and; CPI, if any of these two reports are hot, then the "June" and "July" meetings will suspend interest rate hikes. Considering that consumers will travel intensively in summer, this will further boost consumption and stimulate inflation.

In addition to inflation, last Friday's data also showed that Americans' income and consumption are also growing, with income rising by 0.4% from the previous month, up from 0.3% in the previous month. Consumption rose sharply from the previous month; 0.8%; compared with only; 0.1%; last month. In terms of service consumption, it is driven by financial services, insurance and medical care, while on the commodity side it is driven by new cars and medicines.

On the other hand, the savings rate fell again, from 4.5% to 4.1%, further evidence that American consumer confidence remains high.

Speaking of strong consumption, Friday's durable goods report reflected the same: ;4;Mom-on-month sales of durable goods rose ;1.1%; Also revised up; 0.1%; to; 3.3%;. The surge in March was mainly driven by Boeing's large orders. If military equipment and airliners are excluded, sales of durable goods have declined, but the April data is a real rebound. Sales of durable goods, which exclude military equipment and technology, rose 1.4% month-on-month in the report, much higher than the 0.6% decline in March and the 0.2% decline in February. Among them, the manufacturing industry, which accounted for the largest proportion, rose by 1.7%; machinery and equipment rose by 1.0%; automobiles and parts fell by only 0.1%.

Other data highlights from last week:

The final value of the University of Michigan consumer confidence index rose to 59.2 in May, surpassing the initial value of 57.7.

The number of Americans applying for unemployment benefits for the first time was 229,000, less than the expected 245,000, the previous value was revised to 225,000. As of May; month; 13; the week ended, the number of consecutive jobless claims was; 1.794; million, which was lower than the expected; 1.80; million, and the previous value was; 1.799; million.

In the first quarter of the United States, actual GDP was revised from 1.1% to 1.3%, personal consumption expenditure (PCE) was revised to 3.8% from 3.7%, and core personal consumption expenditure (PCE) annualized quarter-on-quarter was revised from 4.9% to 5%.

United States; May; Month; Markit; Manufacturing; PMI; Initial Value; 48.5;, Lower than Expected; 50;, Previous Value; 50.2;, Services; ;52.5;, previous value was; 53.6;, composite; PMI; was ;54.5;, above expectations; 53;, previous value was ;53.4;.

Focus this week:

Monday is the United States; Memorial day; and the British spring bank holiday, the stock markets of the two countries are not open

U.S. Tuesday; 5; Monthly Consumer Confidence Index

Debt Ceiling House Vote on Wednesday

U.S. Thursday; May; Month; ADP; Employment data

U.S. Friday; May non-farm payrolls (consensus is labor market starting to cool), debt ceiling Senate vote

U.S. stock earnings include HP on Tuesday, Salesforce, C;3.AI, Chewy on Wednesday, Dollar general, Macy’s, Bilibili, lululemon, and Dell on Thursday.

Our Review:

June;~;August; month is a critical time window, because there are four major contradictions will be very obvious (only the United States will be discussed here, and follow-up articles will discuss more such as Japan’s monetary policy, European inflation and China’s progress ).

Contradiction 1:

At present, the market expects that about 500 billion to 700 billion U.S. dollars of new government bonds will be issued within three months after the debt ceiling agreement is reached. Performance.

One possible source of funds for receiving new treasury bonds is the balance of money market funds and reverse repurchase agreements (RRP), and another possible source is the decline in bank deposits. It would be a good thing to see a decline in these data, indicating that liquidity pumping has been hedged.

And let's not forget that raising the debt ceiling comes at the expense of government spending cuts over the next two years, though not on a scale that would significantly alter the economic outlook.

Contradiction 2:

On the stock market side, giants in almost every industry are getting bigger, such as technology, banking, energy, retail, healthcare, defense, etc., so we see that the ordinary market capitalization-weighted S&P index is rising, while the equities However, the general index has fallen, and this trend has been particularly obvious since March; since the current round of rise is "AI" as the core driving force, the efficiency or performance benefits it brings will not be reflected in a wide range of industries in the short term , AI; and the technology track have the possibility of bubbles, especially considering that the "PE" of big technology companies is more than twice that of ordinary companies. Is the market still able to deal with stocks with increasingly expensive valuations?

Contradiction Three:

Recently; Fed; officials have made a lot of hawkish remarks, and as economic data continues to be hot, interest rate futures for the second half of 2023 have continued to fall, and the rate cut predicted by the market earlier this month was close to; 100; basis points, No rate cut is now expected (already consistent with the Fed's March; dot plot;). This rapid shift occurred only last week, and its lasting effects can be considered as yet to be fully fermented.

Contradiction 4:

Despite upbeat sentiment in stocks, U.S. money market funds saw massive inflows last week (+39.9 billion, the highest in five weeks), showing the strong appeal of fixed income for funds, which has dissipated amid expectations of rate cuts this year The backdrop will remain stable over the next few months.

In summary, most stocks did not participate in the rally, and the current trend is strongly influenced by the technology industry, especially those companies closely related to "AI" and chips. Dominance by a few large-cap tech stocks could leave the market vulnerable, and any setbacks for "MAGMA" or "NYFANG," such as disappointing earnings or changes in industry regulations, could have a significant impact on the overall market.

There is also the possibility that more stocks will start to follow the rise of big technology, so that the bull market can last for a long time, but this needs to be supported by tangible earnings data. Artificial intelligence has indeed reduced investors' reliance on interest rate changes. It can be expected that many companies will emerge in the next few months and start to grasp the concept of "AI". However, it will take time for which industries can really get the light of "AI". Observe that any stock price rise that cannot be reflected in performance or dividend increases is fragile.

For example, according to; Factset; statistics, only; 110; S & P; 500; companies mentioned artificial intelligence in the latest conference call:

For example, even the so-called bet on innovation; ARKK; performance is far behind; NYFANG:

In the development of the field of AI, it feels that a large number of investors have not fully participated in it. Although the valuation of related companies is expensive, it is far from being outrageous. We expect to witness the "AI" related investment targets in the next few months From expensive to bubble, and even to the evolution of "MEME", for example, last week the "WSB" community was very excited about the concept of "AI".

This sentiment will definitely spread to the cryptocurrency market, because unlike mature industries, cryptocurrency and "AI" are targets with huge "adoption" potential, but liquidity concerns and the continuous high pressure of supervision are in the digital currency market. The head may limit its gains.