SIFs Higher on Trade News but Face Labor Pressure

STOCK INDEX FUTURES

Index futures are higher after the United States Court of International Trade ruled that President Trump does not have the authority to implement sweeping tariffs. The court ordered the administration to issue new orders reflecting the ruling within 10 days. The White House swiftly appealed the decision and signaled it may take the case to the Supreme Court if necessary.

Initial weekly jobless claims came in higher than expectations, with 240,000 new claims, higher than estimates of 229,000 and notably higher than last week’s figure of 226,000. Revised US GDP figures show a Q1 contraction of -0.2%, smaller than the initial reading of -0.3%. The higher-than-expected jobless claims dampened the overnight rally in the indexes.

Tech giant and member of the “Magnificent Seven,” Nvidia, beat earnings forecasts Wednesday. The company also said it expects to lose about $8 billion in revenue due to a US ban on its H20 chips to China. Nvidia represents approximately 7% of the S&P 500’s weight and roughly 11% of the Nasdaq-100.

Several German automakers are in trade talks with the White House over a potential import tariff deal. The manufacturers are seeking to leverage their US investments in order to get credits on cars they export from the US, which could then be deducted from tariffs.

Despite the recent volatility, stock valuations are still relatively high by historical standards. Companies in the S&P 500 are trading at 22 times their expected earnings over the next 12 months, as of Friday’s close, versus a 10-year average of 18.7 times. The high price-to-earnings ratio is at odds with the many uncertainties surrounding the economic outlook, primarily the still-unfolding consequences of the Trump administration’s trade policies.

CURRENCY FUTURES

The US dollar index initially rallied on news that a US court blocked President Trump from imposing sweeping tariffs but fell into negative territory after weekly initial jobless claims were higher than expected. Market attention returns to a still uncertain trade outlook and continued worries over the US fiscal outlook. The greenback is lower against most major currencies.

Euro futures are rallying on dollar weakness after being under pressure from a stronger dollar over the last several days.  The European Central Bank is set to meet next week, with markets pricing in a 90% chance of a 25 bps rate cut. ECB Chief Economist Philip Lane said that he expects euro area inflation to fall, despite risks of US­-EU trade talks failing that could drive inflation up.

British pound futures are higher on dollar weakness and remain near three-year highs. Improved market sentiment, strong retail sales data, and reduced bets on the Bank of England to cut rates have provided upside strength to the pound in recent days. Inflation in the region remains elevated at 3.5%, higher than the desired level for the Bank of England. Markets are expecting the central bank to hold rates steady at its June meeting.

Australian dollar futures are higher; weighted CPI on Wednesday came in hotter than expected at 2.4% vs. an expected 2.3%, matching last month’s figure. The weighted CPI report is heavily focused on goods rather than services and usually does not have significant bearing on policy rates. Markets are pricing a 67% probability the Reserve Bank of Australia will cut rates at the July meeting.

Japanese yen futures are higher after hitting two-week lows this week. Reduced safe haven demand and reports that Japanese authorities may intervene in the bond market by reducing bond issuance have put downside pressure on the yen in recent days. Japan’s finance ministry sent a questionnaire to market participants Monday evening asking for their views on issuance and the current market situation. Investors took the move as a sign that authorities are seeking to stabilize the bond market.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve after falling overnight, gaining strength as weekly jobless claims came in higher than expected.

Economists at the Federal Reserve took a negative view of how trade policy shifts were likely to affect the economy over the next couple of years at the central bank’s May meeting, minutes showed. The Fed highlighted that GDP projections were weaker than expected and that the effects of tariffs would raise unemployment and lift inflation, hurting the Fed’s dual mandate goals. It should be noted that the meeting occurred before the US-China trade developments and has not accounted for any news since May 7^th.

Worries over a gaping budget deficit and overall trade uncertainty remain in the Treasury market as investors are demanding a higher premium for holding onto longer-term bonds. Most of the selling in the bond market has been at the long end of the curve, driven by concerns of long-term inflation resulting from President Trump’s tariffs and tax cuts.

The Treasury Department is expected to need to increase most of its longer-dated debt auction sizes later this year or next year to finance the government’s growing debt problem. US public debt is around 100% of gross domestic product and projected to rise to 134% over the next decade. Investors are worried that an increase in bond issuance will outpace demand, as recent Treasury auctions have been met with tepid demand, although foreign demand remains stable.

April PCE inflation figures are due Friday; economists are expecting PCE figures to come in at 2.2% on an annualized basis. The five-year Treasury note auction was met with robust demand yesterday; the auction fetched a yield of 4.07%, matching market conditions.

The 10-year Treasury yield is 4.45%, and the 30-year yield is hovering around 4.95%. The spread between the two- and 10-year yields is 48 bps, one bps lower than Wednesday.

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