All eyes on the US, as stocks get a boost from Micron, and the oil price continues to fall

All is good with the world again, after a bruising week for US stocks. June has been terrible month for the Nasdaq, which is down more than 5% so far. However, if the futures prices are correct then the Nasdaq could surge more than 2% later on Thursday.

Can Micron’s results lead to a prolonged tech rally?

The driver of today’s stock market  gains is a rebound is tech. Micron, the semiconductor firm, reported stunning results last night. The company reported revenue of $41.46bn last quarter, and gross margin of 85%. Next quarter’s forecasts were also strong, with $50bn in revenue, $10bn in capex and an 86% profit margin expected. These are almost perfect results, and the stock is surging in the pre-market, currently it is up 16%. This suggests two things: 1, the AI spending boom has further to run, and 2, the recent tech sell off, which includes a 13% decline in Palantir in the past week, and a 12% drop in Arm holdings, is linked to valuation issues, rather than economic concerns.

Hand to mouth rally for the Nasdaq

After a strong run this year, the Nasdaq is still higher by 10% YTD, volatility is starting to hit the mighty US tech stock index. The trading pattern is becoming hand to mouth, the index only rallies when it is fed good news, but the overriding bias is to worry about valuations. Due to this shift, Micron’s results alone may not be enough to sustain a recovery rally in stocks as we move into the last trading days of June.

Shifting rate expectations at the Fed is driving the USD

The dollar has also been on a tear higher in the past few trading sessions. In the past month, the dollar is significantly higher vs. the major currencies. For example, EUR/USD is down 2.58% month to date. The JPY is also lower by 1.6%, and GBP is 2% lower. The dollar is a big beneficiary of shifting interest rate expectations from the Fed. There is now a 34% chance of a rate hike at next month’s meeting, and there is a growing chance that the Fed could hike interest rates twice this year.

When Fed rate cut expectations shift, the immediate impact is felt in the FX market, and in the dollar. Now that the market is starting to price in a shift in Fed policy, the dollar will be the beneficiary. However, the Fed under Kevin Warsh does not give forward guidance, so the future direction for US rates will be dependent on economic data. This gives extra importance to today’s PCE data from the US. The market is expecting an increase to 4.1% for May up from 3.8%, which is in line with the May CPI report. This data, along with personal income and spending  data that are also released, could be a key driver of price action later today.

Without Fed guidance, the market will fill the void, and if we get a strong set of data today, then we would expect bets on Fed rate hikes to surge, and the dollar to extend recent gains. It may also hit the gold price, which is down 12% in the past month. The price of the yellow metal is still below the key $4000 per ounce level, and it could fall further if US rate hike bets continue to grow.

The decline in the oil price impacts global bond yields

Global bond yields are stable as we lead up to this data but expect a big reaction when the data is released. Interestingly, US Treasury yields are not rising in line with rate hike expectations, as the fall in the oil price is seen as being more important to the Treasury market. After remaining firm in recent weeks, Treasury yields finally responded to the large decline in the oil price on Wednesday and yields fell back, Brent crude is lower by 1% today and is down 7% in the past 7 days.

Is the May PCE data already out of date?

Bond traders  comfortable buying Treasuries when WTI is below $70 per barrel, and when global oil prices are back at pre-war levels. While there could be some volatility as peace talks continue, the focus is on price, and right now prices are moving in the right direction. Looking ahead, US and global inflation may not stay elevated for long, as the price of diesel falls below $5 in the US . Thus, although headline PCE is expected to soar for May, the more important questions are what core inflation is doing, and are the May numbers out of date due to the sharp fall in energy prices in June.

Europe basks in record heat, and high electricity prices

While oil prices are falling, European electricity prices are rising due to the heatwave. This was especially notable in France and Spain, and this could offset some of the easing of price pressures in the June CPI data.

Overall, the focus on Thursday will be on US inflation data, how long the US stock rebound can last for, and if the oil price continues to decline, due to a mini oil glut now that Middle Eastern supply is back on board.