Consumer sentiment slumps in the US

Consumer sentiment in the US dropped in May according to a survey from the University of Michigan. Its sentiment index fell to 67.4, down from 77.2 in April and missed market expectations. A rise in inflation expectations helped to bring consumer sentiment lower with one-year inflation expectations at 3.5%, up from 3.2% a month earlier, while long-run expectations for inflation also edged higher to 3.1%. The share of respondents expecting their household finances to worsen over the next year rose to its highest level in the last six months while more respondents also expect the US economy to worsen over the next 12 months. The persistent strength of inflation will be weighing on consumers and financial markets in general. The estimate for April CPI inflation will be published on May 15 with median estimates of 3.4% y/y.

Inflation in China rose in April to 0.3% y/y from 0.1% in March. China has been a notable outlier among major economies as inflation has been very low or at risk of flipping to deflation. Over-capacity in output as well as a downbeat property market will be helping to keep prices low on a headline basis. Producer price inflation dropped in April, down 2.5% y/y.

The UK economy expanded by 0.6% q/q in Q1 2024, ending the recession that took hold in the second half of 2023. The improvement in the economy was led by investment with business investment up 0.9% q/q in Q1 while household spending also flipped to growth of 0.2% from a modest decline in the previous quarter. Net trade was also supportive for growth as a result of a steep drop in imports of -2.3% q/q in Q1. The improvement in the economy was faster than market expectations and clearer messaging from the Bank of England that rates will move lower later in the year should help to provide more support to the UK’s economy in 2024.

The Emir of Kuwait has dissolved the country’s parliament and suspended some elements of the constitution for a “period not exceeding four years.” The dissolution of parliament follows four elections to the National Assembly with little political momentum. Members of the assembly have held up approval of a national debt law which has at times constrained the fiscal flexibility of Kuwait.

Today’s Economic Data and Events

• 11:00 TU Current account balance Mar
• 16:00 IN CPI y/y April: forecast 4.8%

Fixed Income

• US Treasuries sold off heavily at the end of the week in response to the tick higher in inflation expectations reported by the University of Michigan. The 2yr UST yield rose 5bps to settle at 4.865% while the 10yr yield added 4bps to close at 4.4963%. Markets will fixate on the release of the April CPI estimate to set the next trajectory for treasuries.
• Fed governor Michelle Bowman said she had “not written in any cuts” for rates this year, expecting instead that the Fed would stay “where we are for longer.” Elsewhere, Dallas Fed president Lorie Logan said that it was “too early to think about cutting rates.”
• Bond markets in general had a soft week with developed market government bonds ending Friday lower while an index of USD-denominated emerging market bonds also eased back. Regional credit was a little stronger at the close on Friday but marginally so.
• Fitch affirmed their ‘BB-‘ rating on Jordan and kept the outlook for the rating at stable.

FX

• The US dollar ended Friday higher as higher-than-forecast inflation expectations will keep the prospect of high US rates for longer in play. EURUSD ended the day down 0.1% at 1.0771 while GBPUSD closed near unchanged at 1.2525 after the better than excepted GDP print for Q1. USDJPY edged higher, up 0.2% to 155.78.
• Amid commodity currencies, USDCAD moved lower on Friday to the benefit of the Loonie. The pair settled at 1.3672. AUDUSD, however, dropped by 0.2% to 0.6604 while NZDUSD also fell 0.2% to 0.6020.

Equities

• Equity markets generally had a positive end to the week. The Dow Jones added 0.3% on Friday while the S&P gained 0.2%. European markets were stronger with a 0.6% gain in the FTSE and a similar rise on the Euro Stoxx 50. Asian markets also had a strong close with the Nikkei up 0.4% on Friday while the Hang Seng jumped by 2.3%.
• Regional markets were more downbeat. The DFM dropped 0.2% at the close while the ADX was lower by 0.3%.

Commodities

• Oil prices tanked at the end of the week with Brent futures down 1.3% at USD 82.79/b and WTI down a similar amount to close at USD 78.26/b. Iraq’s oil minister has indicated he will not support extending oil production cuts into the second half of the year when OPEC+ ministers meet next month. Iraq has been over-producing relative to its target level.
• The IEA’s secretary general, Fatih Birol, said that the “least that the countries…need is high oil prices” in a oblique critique of OPEC+ potentially agreeing to extend or tighten oil production cuts next month.