Markets Today: The price of supply chain disruption

It’s been a choppy session for US stocks, even though the news on the economy was largely positive and earnings results have been strong.

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Today’s podcast

Overview: The only way is up

  • After a volatile session, US equities end the day higher, EU lower
  • Supply disruptions a common theme
  • As expected, US GDP growth jumps in Q1 propelled by the consumer
  • UST yields higher on the day, but lower during US session
  • USD mixed. Higher oil prices helping CAD, but AUD and NZD a tad softer
  • Coming Up: China PMIs, AU Private credit, EZ GDP, US Income/Spending, PCE. Exxon and Chevron report before the bell

We’ve been broken down,To the lowest turn
Bein’ on the bottom line,Sure ain’t no fun….
The only way is up, baby.For you and me now – Yazz & the Plastic Population

In an up, then down and up again session, US equities have closed in positive territory with the S&P 500 ending a two-day losing streak. In line with expectations, US GDP jumps in Q1 with the consumer leading the way. Longer dated UST yields edge a little bit higher while the USD has a mixed day. AUD and NZD are a tad softer, oil prices gain for a third day and copper climbs above 10000, before ending the day unchanged

Apple and Facebook reported after the bell yesterday. Both companies beat earnings expectations with their shares gaining in afterhours trading. This backdrop helped US equities open the overnight session with a positive tone, but a theme of supply shortage around the globe weighed on sentiment. Yesterday Apple and Samsung joined automakers alerting investors of production cuts and lost revenue due to chip supply constraints. Samsung, which is both a producer and user of chips, said revenue and profit at its mobile division will slide this quarter while Apple warned chip supply constraints are restraining sales of iPads and Macs.

After turning lower halfway through the session, the S&P 500 ended the day up 0.68%, the Dow closed +0.71% and the NASDAQ was +0.22. A solid Q1 US GDP print (more below) helped sentiment while most overnight earning reports beat expectations including Caterpillar, McDonald and Kraft Heinz. In Europe the 600 Index fell 0.3%, reversing early gains.  Car makers (-2.6%) led the decline amid warnings over the negative impact chip shortages will have on productions. Twitter shares have fallen around 10% after the bell following disappointing sales forecast.

US Q1 GDP expanded at a 6.4% on an annualized basis following a 4.3% print in Q4-20.  Personal consumption, the biggest component, surged at an annualised rate of 10.7%. Investment was also a major contributor with Non-residential investment up an annualised 9.9%, while residential investment increased at a 10.8% rate. Exports fell 1.1%, while (larger) imports rose 5.7%, resulting in 0.87% drag on GDP from net exports (adding to the US Twin Deficits dynamic). Inventories dragged 2.64% point off GDP suggesting a material payback could be in order over coming quarters though supply disruptions suggest this may not be a smooth process. Lastly government spending rose 6.3%, adding 1.12%pts to GDP and mostly at the federal level.

In what has become a common pattern in April, UST yields edged higher during our APAC (UST futures as Japan is on holidays) and then European sessions, but then eased back during the US session. The 10y rate climbed to an overnight high of 1.6860%, ending the US session at 1.6361%. The 10-year break even inflation rate stretched to almost 2.46%, a fresh eight-year high, before closing the session at 2.43%.

Copper stretched higher and broke up through the $10,000 per tonne mark before this drew out the sellers and the price fell back to $9,850. Oil prices are higher, with Brent Crude almost reaching the $69 mark again, before paring gains.

In currency markets the USD is a tad stronger in index terms (DXY and BBDX +0.05%) but mixed within G10. The move up in global yields sees USD/JPY up 0.30% with BoJ YCC policy anchoring JGBs, the pair briefly traded with a ¥109 handle and now exchanges hands at ¥108.91. Gains in oil have helped CAD (+0.28%), although  NOK is unchanged while the AUD and NZD , the other two commodity linked currencies, are a tad softer. The antipodean currencies may be showing a higher degree of sensitivity to the volatility in equity markets while month-end flows are also likely kicking currencies around for no fundamental reason. For the third time in 10 days the AUD found the air thinning above the 78c mark, trading to an overnight high of 0.7818, before easing back, the pair now trades at 0.7769. Yesterday NZD rally up through 0.7285 proved to be temporary with the currency now trading down around 0.7245.

In other economic news, Euro area economic sentiment – a mix of business and consumer confidence – blasted up through expectations to reach its highest level since late 2018. While Q1 GDP figures for the region due tonight (more below) are likely to show an economic contraction, the sharp uplift in sentiment bodes well for the recovery setting in from Q2. German CPI inflation broke up through the 2% mark, but that is widely seen to be temporary, driven by one-off effects and core inflation is running much lower than that.

Coming up

  • NZ April consumer confidence is the first cab off the rank followed by the China Official manufacturing and non-manufacturing PMIs for April. Australia’s private sector credit figures (Mar) are also out this morning.
  • Later today EZ publishes CPI (Apr Preliminary) and Q1 GDP (Advanced) data and then tonight the US gets personal income/spending numbers and PCE deflator (Mar Core 0.3%m/m exp. vs 0.1% prev./ 1.8%yoy% exp vs 1.4% prev.) along with the final U. of Michigan Consumer Sentiment reading (April Final 87.5 exp vs 86.5 prev).
  • Oil is the focus in the US reporting season with Exxon and Chevron reporting ahead of the US bell on Friday.
  • Australia March Private Sector Credit Growth should continue to be supported by strong owner-occupier housing credit growth. NAB and Consensus are forecasting 0.3%m/m.
  • After weaker-than-expected Q1 GDP figures, China’s April PMIs will be closely watched to confirm ongoing growth momentum. Consensus sees Manufacturing at 51.8, one tenth below the previous month while Non-manufacturing is seen at 56.1 vs 56.3 previously.
  • The consensus for EZ Q1 GDP is at 0.8% q/q decline, the markets is well aware this is due to the vaccine missteps and extended lockdowns. The market also knows growth will pick up dramatically in Q2. The reflation trade suggests investors are more focused on the trajectory than the rear-view. German Q1 GDP is seen falling to -1.5% q/q,but will also likely see a decent upgrade to coming quarters.

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