U.S. Indexes ended the week higher amid broad strength (RSP +0.9%). Healthcare, Industrials, and Utilities outperformed, while Communications was the only sector notably in the red. Hardware names (DELL +16.8%, HPQ +15.3%) surged on Lenovo reporting its highest quarterly growth rate in five years amid strong consumer demand for PCs. Separately, Fed’s Waller shifted to hawkish from his dove stance at the start of the year, arguing against the easing bias in the statement, adding that it is “crazy” given recent data (hot CPI, PPI, and NFP in Apr), to be talking about rate cuts in the near future. The remarks resulted in short-end underperformance in treasuries, leaving money markets pricing in one 25 basis point rate hike by year-end. Meanwhile, Kevin Warsh was sworn in as the 17th Fed Chair, albeit remarks had little impact. Geopolitics continued to dominate the tape, albeit with conflicting reporting. The main takeaways are that Pakistani and Qatari officials are in Iran to try and finalise an agreement between the US. Sky News Arabia, via a source, boosted optimism, noting that negotiations in Tehran have reached an understanding on broad outlines regarding the nuclear issue. However, an Iranian FM Spokesperson said the differences between Iran and the United States are deep and significant. Ultimately, oil settled slightly firmer as markets remain jittery over the future; Axios reported “A source close to President Trump claimed that Trump had grown increasingly frustrated over the past several days and has raised the possibility of a final major military operation”. In FX, the Dollar was broadly firmer against peers, supported by Waller while the Swiss Franc and Sterling saw modest strength. US data saw University of Michigan Sentiment hit a record low and inflation expectations (1yr & 5yr) rise from April. The cost of living remained the top concern, with 57% of consumers spontaneously citing high prices as eroding their personal finances. Fed Member Waller gave a very hawkish set of remarks, especially given his usual tone, as the influential Governor noted that they should remove easing bias from the statement, although he is not advocating for a hike at the moment. Note, in the prior meeting, Waller did not dissent in re. the removal of the language. Waller said do not expect to support a change in the policy rate in the near term, and the outcome will depend heavily on the length of the Iran conflict. Waller noted that if expectations start to become unanchored “would not hesitate” to support a rate hike and cannot rule out hikes if inflation does not abate soon. On the dual mandate, he said the labour market is in balance and no longer the chief concern in determining the path of policy, and he is concerned about climbing expectations as the Fed’s inflation miss enters its sixth year. In the Q&A section, Waller said if expectations over the next 2/3/4 years rise, that is a problem. Want to run an ample reserve type system, and do not want to go back to a scarce reserve system. It is “crazy” given recent data to be talking about rate cuts in the near future. Final UoM for May saw disappointing downward revisions, as sentiment was revised down to 44.8 (prev. & exp. 48.2), conditions 45.8 (prev. & exp. 47.8), and expectations 44.1 (exp. 48.5, prev. 48.1). In addition, 1yr inflation expectations moved up to 4.8% from 4.7%, above the expected 4.5%, with the longer-term 5yr jumping to 3.9% from 3.4%, which was also the consensus. Overall, Oxford Economics notes US/Israel-Iran war continues to depress consumer sentiment, with low-income consumers feeling the most pessimistic about further increases in gas prices. OxEco adds that a sustained rise in long-run inflation expectations would limit the Fed’s ability to view the oil price shock as a one-off. Elsewhere, Oil closed flat while Gold ended Friday’s session with a 0.75% loss.
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