S&P500, Gold dip on fears over debt ceiling talks

The S&P 500 and gold traded weaker for much of the morning on better-than-expected economic data, as traders continue to monitor today's debt ceiling meeting between President Biden and House Speaker McCarthy. Core retail sales were strong in this morning's data, while industrial output came in much stronger than expected, and the housing index exceeded expectations as well. Data from China suggests a slow recovery from its post-COVID lockdown.

US Consumers still spending, could keep rates higher for longer

US retail sales data show that ‘core’ consumer spending continues to grow thanks to monetary stimulus still in the system, and the growth of consumer credit via charge cards. US consumer’s went on a spending spree when they received their stimulus checks during the pandemic, and they grew accustomed to the good feeling that gave to them. As such, the consumer is increasingly relying on credit card debt to maintain that spending pattern. That spending continues to keep us out of a recession, but it will have longer-term implications when interest rates rise.

China’s fitful recovery could impact global demand

Nearly all of today’s economic data released in China was weaker than expected, demonstrating that China’s economic recovery momentum is slowing – and that could hit the global demand for commodities and some export goods. China’s central bank denied the presence of deflation in its quarterly report on Monday, stating that commodity prices would continue to increase modestly in the second half of this year. China’s economy has problems at a time when it is exerting itself on the world political stage. China faces growing pressure to inject stimulus into its economy, but that’s challenging to do when other major economies are in a tightening mode. Injecting too much stimulus at this time would risk excessive weakness in the yuan at a time when China wants the world to see its currency as a strong alternative to the US dollar.

S&P500 down, Regional Banks rally

• At the time of writing, the broad S&P 500 and Russell 2000 indices were down by 0.4%, 0.7%, with NASDAQ up 0.2%
• Today’s major move was the 3.3% bounce in the KBW Regional Bank Index after weeks in decline
• The VIX, Wall Street’s fear index, was up 2% at 17.5
• The dollar index was unchanged at 102.4, above its long-term support level, with Dollar/Sterling off 0.3% and Euro/Dollar unchanged
• Yields on 2- and 10-year Treasuries rose modestly to 4.06% and 3.55%, respectively

Gold falls under 2K mark, Oil falls

• Gold prices fell by 1.5%, below the $2,000 mark for the first time since May, to $1,992 per ounce
• Crude oil prices fell 0.3% to $70.9 per barrel
• Grain and oilseed markets are mostly weaker as well. Soybean prices led the collapse in the sector and Wheat prices also posted double-digit losses to erase much of yesterday's gains

Underlying US retail sales beat expectations

• Retail sales rose 0.4% month-on-month in April, short of an anticipated 0.7%
• March data was revised to a decline of 0.7%, an improvement from the 1.0% decline originally reported
• However, retail sales minus vehicles rose 0.4% month-on-month in April, matching analyst expectations – and retail sales minus vehicles and gas rose 0.6%, more than triple the 0.2% expected by analysts.
• March data was revised upward to losses of 0.5% from the 0.8% decline originally reported

Chinese economy still struggling in post-Covid recovery

• Chinese retail sales rose 18.4% year-on-year in April, but against a low base
• Analysts expected sales to be up 20.2%, so they are concerned that China’s post-Covid recovery continues to struggle
• Retail sales were down 7.8% month-on-month in April, raising concerns about China’s economy
• Restaurant catering sales, which ought to most benefit from pent-up demand, were only up 1.2% month-on-month

Chinese unemployment rates rising

• China’s youth unemployment was 20.4% in April (for those 16 to 24 years of age), up from 19.6% in March
• That number may go even higher in the next couple of months as 11.6 million college graduates enter the workforce

Ukraine-Russia grain initiative could expire, cause higher prices

• The Ukraine grain initiative expires in two days and no talks are scheduled this week, hosted by turkey
• Talks are likely suspended amid mixed signals from the participating parties, complicated by Turkey’s anticipated runoff presidential election on May 28
• An end to the Russia-Ukraine deal, which allowed limited grain exports by ship, could sharply reduce global supply and lead to higher wheat prices
• Meanwhile, China continues to work behind the scenes to encourage a peaceful solution to the Ukraine war
• The market currently assumes that grain will flow, but it will be at a higher cost
• Friday’s US Department of Agriculture crop report focused market attention on various global risks, particularly for wheat

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com