US market gets a boost from Walmart

US market gets a boost from Walmart as the meme stock craze fizzles out

US stock futures are pointing higher on Thursday, suggesting that the move to record highs for the S&P 500 could be extended after better-than-expected Walmart results. The supermarket giant saw sales increase by 3.8% YoY, and sales beat expectations. Walmart also reported a stronger outlook for sales for the rest of this year. This has assuaged some concerns about the US consumer, after US retail sales moderated sharply last month. It is worth noting that Walmart also reported that US consumers are concentrating on staples over discretionary big-ticket items, which suggests some moderation in consumer activity that could weigh on US growth going forward.

Walmart’s share price is up by more than 4.5% in the pre-market, after its stock price fell 1% this year. The increase in Walmart’s share price is worth watching. We have noted recently that the stock market rally in the US is broadening out. Thus, if Walmart can hold onto today’s gains, it could play into this theme, with the broader stock market catching up with tech.

Sage weighs on the FTSE 100

Elsewhere, European stock markets are lower on Thursday, but they are recovering some early losses as we wait for the US markets to open. The FTSE 100 pulled back after some weaker earnings reports on Thursday. Sage, the software company, fell sharply at the open and trading had to be halted after the stock fell more than 20%, the biggest daily drop since 1993. It has now resumed trading and is lower by 8%. The driver was its Q1 earnings report, which was weaker than expectations. Their growth outlook also disappointed investors, since it was downgraded for the first half of this year, which has led to fears about the outlook for small and medium sized UK businesses that are a key customer group for Sage software.

Sage shares fall sharply after hitting record highs in recent weeks

The market may have overreacted to these results, as the Lloyds Bank Business Barometer for April showed that UK businesses still have pricing power, and sentiment remains close to recent highs. Businesses also remain relatively optimistic, the 12-month business activity index is in positive territory and is well above the lows reached in mid-2020. Thus, Thursday’s price action could be a moment of profit taking before the uptrend continues. Sage’s profit downgrade highlights how markets are priced for perfection. Sage’s stock price made a record high at the end of April, and a weak outlook obviously could not sustain this elevated valuation, so some weakness on the back of the Q1 earnings report is to be expected.  

Rate cut expectations could reignite market rally

Overall, today’s market weakness is expected to be temporary. The latest inflation data from the US has pushed up the chances of a September rate cut from the Fed to 60%. We believe that the prospect of lower interest rates is too tempting for the market to ignore. US 2-year Treasury yields are lower by 15 basis points since Tuesday. The dollar index is at a one-month low, and the market is close to fully pricing in two rate cuts from the Fed for this year. However, as we said on Wednesday, if the Fed is serious about cutting rates in the coming months, then it may want to consider a cut in July over September, due to the latter’s proximity to the November Presidential election.

There will be a plethora of Fed speakers later Thursday. Fed members Goolsbee, Mester and Bostic, are all speaking later today. Bostic and Mester are both considered hawks, so it will be interesting to get their view on the inflation report for April, after the super core rate of price growth for April continued to rise. The market has been recalibrating the prospect of rate cuts in the US this year and it is now pricing in two cuts for this year, it will be interesting to see if Thursday’s Fed speakers agree with the market assumption.  

Meme stock craze fizzles out

A semblance of normality is also returning to financial markets as the meme stock craze has seemingly run its course. GameStop, the meme favourite, fell 18% on Wednesday and is down a further 15% in pre-market trading. The meme stock cheerleaders tend to choose stocks that have large, short interest, and then advocate for retail traders to buy those stocks to punish the evil short sellers. While that worked in 2021 for several months, the market liquidity may not be there to do the same in 2024. There was no fundamental reason for the price surge in GameStop earlier this week, and the short interest ratio remains high, suggesting that the short sellers may get the last laugh.

There is a dearth of economic data today, however, EUR/USD might be in focus as the market waits for a raft of ECB speakers. The market will be looking for more confirmation that a rate cut will come next month. The market is currently pricing in a 96% chance of an ECB rate cut next month, with nearly 3 cuts priced in for 2024 in total. With the market primed and ready for a rate cut in June, if an ECB member throws cold water on this expectation, it could be a volatile day for European stocks, which are close to record highs, and for the euro, which has made an impressive recovery vs. the USD in the past month, climbing from $1.06 to $1.0870. The next key level for this pair is $1.10.

Dollar weighed down by Fed rate cut expectations

After CPI fell and retail sales in the US also moderated on Wednesday, the dollar is the weakest currency in the G10 so far this week. It is particularly weak vs. the NZD, and is down 1.6% so far, as New Zealand’s inflation rate remains higher than the US, at a 4% annual rate.

A fly in the ointment for global central bankers is the surge in commodity prices. Bloomberg’s commodity price index is back at its highest level since November last year, and copper is above $10,200 per tonne. So far this is not impacting rate cut expectations or denting markets sentiment, but it is worth watching closely.