Plotting the slope for the Fed's final glide path

Markets

US stocks edged lower on Monday, trimming early gains, as investors weighed the near-term outlook for Apple while sifting through the economic data and plotting the slope for the Fed's final glide path as we near the end of their aggressive rate hike cycle.

After popping through 4300, briefly taking it into the technical bull-market territory, the S&P 500 rally train was slightly derailed when US stocks turned lower after a weaker-than-expected ISM Services survey and slightly uncertain investor take of a much-anticipated product launch from tech giant Apple.

Given that investors have very strong recession priors and it's well understood the services sectors are driving the bulk of the post-Covid cross-asset recovery, the negative services print was viewed a tad pessimistic on a multi-cross-asset level as the summer lull beckons.

At 50.3, the ISM services printed well below consensus, missing the estimate from five dozen forecasters. The range was 50.5 to 53.7

And given the narrow breadth of the mega-cap AI tech-driven rally that has lifted the S&P 500 to a 12 %YTD, a wobble in any of the heavyweight tech stocks (AAPL, MSFT, GOOGL, AMZN, NVDA, TSLA, META), who returned 53% YTD vs. just 0% for the remainder of the S&P 500, would naturally tilt the tape lower.  

Still, the eroding services sentiment may also give the Fed reason to finally pause its rate hiking cycle at its meeting next week. And the slowing business sentiment also may lend itself to the 'Goldilocks' environment that has been developing since the resolution of the March Regional Banks turmoil.

Ultimately if the Fed chooses to pause the rate hike cycle at the June meeting, the table may be set for a continuation of a 'not too hot/not too cold' environment conducive to stock picking. 

Oil markets

Macroeconomic data will continue to be the primary driver of speculative oil demand. And even more so when it’s a negative read on the US services sector, where strong demand had been pushing back against the demand weakness from manufacturing sectors. Hence oil prices traded lower in the New York session despite Saudi Arabia's market intervention.

Still, Saudi Arabia's -1 mmb/d cut in July, and its possible extension, is the new marginal bullish piece of the puzzle, creating a substantive backstop for the market. 

It also gives Saudi Arabia considerable flexibility. There is massive speculative pressure to the downside, with visible Brent positioning at its most short since 2020, and WTI positioning is the least long in 11 years. If demand disappoints, Saudi Arabia could extend its -1 mmb/d cut keeping global inventories lean. On the other hand, if demand were to be bolstered by China, fulfilling expectations of +2 mmb/d global growth, then balances would likely tighten of their own accord, and speculative positioning would revert, allowing Saudi Arabia to reverse its temporary cut without any damage to its credibility.

Forex

Although the USD is a bit weaker after the lower-than-expected ISM services print, it is little more than an interday position shuffle as July Fed hike premiums get slightly pared. The point is the pattern of weaker Europe and China data needs to decrease before any hope for medium-term Dollar depreciation can come back into view. 

On that front, despite the Caxin PMI rising further in May, the Yuan weakened, highlighting CNY's challenges as market sentiment around China's growth remains weak. And we think risks are skewed towards further CNY weakness unless there is a more robust and credible policy response than the property measure currently evident. And as the final Euro area PMIs were revised lower yesterday, suggesting real activity is now lagging behind strong European sentiment.