May the 4th is here, and US futures are up slightly ahead of a key Federal Reserve meeting in which the Fed is widely expected to raise rates by 50bps, the biggest hike since the dot com bubble burst in May 2000, and to release plans for balance-sheet normalization; Chair Powell’s post-meeting press conference will provide guidance on potential for bigger rate hikes at subsequent meetings and policy makers’ assessment of the neutral rate. As DB's Jim Reid puts it, "if you're under 43, did 3 years at university and then joined financial markets then you won't have worked in an era of 50bps Fed rate hikes. This will very likely change tonight as the Fed are a near certainty to raise rates by 50bps. In fact it'll be the first time the Fed have hiked at consecutive meetings since 2006. So we enter a new era that won't be familiar to many."

In any case, investors have already priced in the Fed’s largest hike since 2000 - in fact, OIS contracts currently price in around 160bp of additional hikes over the next three policy meetings -  and they will scrutinize Chair Jerome Powell’s speech for clues on the pace of future rate increases and balance-sheet reduction. Some traders are betting on an even larger 75 basis-point hike in June. As such, even though global financial conditions are already the tightest they have ever been (according to Goldman), S&P and Nasdaq futures are both up 0.5%, while 10-year yields drifts lower, having stalled again near 3% at the European open.

"Powell’s words about how aggressively the Fed will tame inflation are likely to shape market sentiment for the next couple of weeks at least," said technical analyst Pierre Veyret at ActivTrades in London. Lyft tumbled 26% in premarket trading after the ride-hailing company’s second-quarter outlook disappointed Wall Street.

Global bonds have slumped under a wave of monetary tightening, with German 10-year yields around 1% and the U.K.’s near 2%, while US 10Y yields are circling 3%. Adding to the tightening outlook, European Central Bank Executive Board Member Isabel Schnabel said it’s time for policy makers to take action to tame inflation, and that an interest-rate hike might come as early as July. Meanwhile, Iceland’s central bank delivered its biggest hike since the 2008 financial crisis and India’s raised its key interest rate in a surprise move Wednesday.

“There is a difficult set up in general for risk assets” as valuations remain stretched despite a drop in equities, Kathryn Koch, chief investment officer for public markets equity at Goldman Sachs & Co., said on Bloomberg Television. She added that “some people think stagflation is a real risk.”

In premarket trading, Didi Global was 6% lower and Chinese technology shares slumped as the U.S. Securities and Exchange Commission is investigating the ride-hailing giant’s chaotic 2021 debut in New York.  Advanced Micro Devices jumped 5.7% in premarket trading after the chipmaker gave a strong sales forecast for the current quarter. Starbucks gained 6.6% after the coffee chain reported higher-than-expected U.S. sales, outweighing the negative impact of high inflation and Chinese lockdowns. Here are some of the biggest U.S. movers today:

• Lyft (LYFT) shares slump 27% premarket after the ride-hailing company’s second-quarter outlook disappointed Wall Street, highlighting investors’ willingness to dump growth stocks at the first hint of trouble
• Uber (UBER) slipped as Lyft’s results hit the more diversified peer. Uber said it rescheduled the release of its 1Q financial results and its quarterly conference to Wednesday morning from the afternoon, after rival Lyft gave a weaker-than-expected outlook
• Airbnb (ABNB) jumps 4.5% premarket after its second-quarter revenue forecast beat estimates, with the company seeing “substantial demand” after more than two years of Covid-19 restrictions
• Livent (LHTM) shares surge 23% premarket, with KeyBanc highlighting an increase in the lithium product maker’s 2022 Ebitda guidance
• Match Group (MTCH) slips 6.7% premarket as analysts say the miss in the dating-app company’s guidance takes some of the shine off its revenue beat
• Didi Global (DIDI) led a drop in U.S.-listed Chinese internet stocks after news of an SEC investigation into the ride-hailing company’s 2021 debut in New York added to investor concerns around the sector
• Skyworks Solutions (SKWS) shares drop 2.5% premarket after the semiconductor device company gave a forecast that was below the average analyst estimate
• Herbalife (HLF) sinks 17% premarket after slashing its full-year forecast and setting second-quarter adjusted earnings per share outlook below the average analyst estimate
• Advanced Micro Devices (AMD) rises as much as 7.5% in premarket trading, with analysts positive on the demand the chipmaker is seeing from data centers
• Akamai (AKAM) falls as much as 14% after analysts noted that a slowdown in internet traffic and the loss of revenue due to the war in Ukraine hit the company’s first-quarter results and full-year guidance

JPMorgan CEO Jamie Dimon said in an interview Wednesday that the Fed should have moved quicker to raise rates as inflation hits the world economy. He said there was a 33% chance of the Federal Reserve’s actions leading to a soft landing for the U.S. economy and a third chance of a mild recession.

“The Fed remains very focused on bringing inflation down, however, any further hawkish pivots will likely be tempered to some extent by the desire to achieve a soft landing,” Blerina Uruci, U.S. economist at T. Rowe Price Group Inc., wrote in a note.

In Europe, declines for retailers and most other industry groups outweighed gains for energy, media and travel and leisure companies, pulling the Stoxx 600 Europe Index down 0.6%. The DAX outperforms, dropping 0.4%, Stoxx 600 lags, dropping 0.5%. Retailers, financial services and construction are the worst performing sectors. Here are the biggest European movers:

• Flutter Entertainment rises more than 6.9% its 1Q update matched broker expectations. Jefferies says a strong U.S. performance fuels confidence that a profitability “tipping point” is nearing.
• Kindred shares advance after its second-biggest shareholder, Corvex Management LP, said it believes Kindred’s board should evaluate strategic alternatives including a sale or merger.
• Fresenius SE shares rise as much as 4.2% on beating 1Q expectations. The beat was driven by the Kabi pharmaceutical division, which benefited from a positive FX impact, according to Jefferies.
• Siemens Healthineers rises after the German health care firm upgraded its earnings guidance. The beat was driven by a “strong performance” in its diagnostics division, Jefferies says.
• Stillfront shares rise as much as 10% after the Swedish video gaming group presented its latest earnings. Handelsbanken says the report provides good news, justifying some relief in the shares.
• Yara and K+S climb after the EU’s proposal to sanction the largest Belarus potash companies. Yara may see higher input prices but its market share may rise in wake of a ban, analysts note.
• Skanska falls as much as 12% after the construction group presented its latest earnings. The report was overall in-line, but construction margins were a weakness, Kepler Cheuvreux says.

Earlier in the session, Asian stocks declined for a third straight day, with the Federal Reserve’s upcoming policy decision and a U.S. regulatory probe into Didi Global weighing on sentiment. The MSCI Asia Pacific Index fell by as much as 0.5%, with Chinese internet giants Tencent and Alibaba the biggest drags. The sector declined on news that the U.S. regulators are investigating Didi’s 2021 trading debut in New York. India’s stock measures fell the most in the region as the domestic central bank hiked a key policy rate in an unscheduled decision. Benchmarks in Hong Kong and Vietnam also fell as some markets returned from holidays, while Japan and China remained closed. All eyes are now on the Fed’s interest-rate decision on Wednesday, with policy makers expected to hike by 50 basis points, the biggest increase since 2000.  

“We have two forces of gravity working on Asian equities -the rising interest rates and the lockdowns and weaker growth in China,” Herald van der Linde, head of Asia Pacific equity strategy at HSBC, told Bloomberg Television. The MSCI Asia gauge has dropped more than 13% this year as rising borrowing costs, China’s Covid-19 lockdowns and rising inflation hurt prospects for corporate profits. Shanghai’s exit from a five-week lockdown that has snarled global supply chains is being delayed by infections persistently appearing in the community. “The most important decision Asian equity investors have to make throughout this year may be duration, how to position themselves if inflation is going to peak,” van der Linde added.

In rates, treasuries advanced, outperforming bunds and rising with stock futures, although price action remains subdued ahead of 2pm ET Fed policy decision. Intermediate sectors lead the advance, with yields richer by ~2bp in 5- to 10-year sectors, before Treasury’s quarterly refunding announcement at 8:30am. Yields little changed across 2-year sector, flattening 2s10s by ~1.5bp; 10-year at ~2.96% outperforms bunds and gilts by ~3.5bp. Dollar issuance slate empty so far; two borrowers priced $3.7b Tuesday taking weekly total past $8b as new-issue activity remains light; at least two borrowers stood down from announcing deals. Bund and gilt curves bear flatten. Euribor futures drop 7-8 ticks in red and green packs following comments from ECB’s Schnabel late Tuesday.

In FX, the Bloomberg Dollar Spot Index was little changed and the dollar was steady to slightly weaker against most of its Group- of-10 peers. Treasuries were steady, with the 10-year yield nudging 3%. The euro hovered around $1.0520 and European bonds fell. The pound rose past the key $1.25 level and gilts fell in line with euro-area peers, as traders braced for the FOMC rate decision later Wednesday and eyed Thursday’s Bank of England meeting. Data from the British Retail Consortium showed shop price inflation accelerated to 2.7% from a year ago in April, the most since 2011. Australia’s dollar advanced against all its Group-of-10 peers and the nation’s sovereign bonds extended losses as retail sales rising to a record high boosted bets for central bank tightening. Retail sales surged 1.6% in March to A$33.6b, more than triple economists’ forecast for a 0.5% increase.

Bitcoin is bid this morning, in contrast to the recent contained sessions, posting upside in excess of 3.0% on the session; albeit, yet to mount a test of the USD 40k mark.

In commodities, oil rallies after the European Union proposed to ban Russian crude oil over the next six months; however, sources indicate that Hungary and Slovakia will receive an extend phase-our period in order to appease their known opposition. WTI drifts 3.2% higher with gains capped near $105 so far. Spot gold steady at $1,868/Oz. Most base metals trade in the green

Looking at the day ahead, the main highlight will be the aforementioned Fed decision, along with Chair Powell’s subsequent press conference. On the data side, we’ll also get the final services and composite PMIs from around the world, UK mortgage approvals and Euro Area retail sales for March, and US data for the March trade balance, the ISM services index for April, and the ADP’s report of private payrolls for April. Finally, earnings releases include CVS Health, Booking Holdings, Regeneron, Uber, Marriott International and Moderna.

Market Snapshot

• S&P 500 futures up 0.3% to 4,180.00
• STOXX Europe 600 down 0.4% to 444.21
• MXAP down 0.3% to 167.37
• MXAPJ down 0.4% to 553.87
• Nikkei down 0.1% to 26,818.53
• Topix little changed at 1,898.35
• Hang Seng Index down 1.1% to 20,869.52
• Shanghai Composite up 2.4% to 3,047.06
• Sensex down 1.2% to 56,318.69
• Australia S&P/ASX 200 down 0.2% to 7,304.68
• Kospi down 0.1% to 2,677.57
• German 10Y yield little changed at 1.00%
• Euro little changed at $1.0527
• Brent Futures up 3.6% to $108.77/bbl
• Gold spot up 0.1% to $1,870.11
• U.S. Dollar Index little changed at 103.40

Top Overnight News from Bloomberg

• A lot is riding on how Federal Reserve Chairman Jerome Powell parries a question he’ll surely be asked after Wednesday’s monetary policy decision: is a 75-basis-point rate hike in the cards at some stage?
• The negative-yielding bond is nearing extinction: there’s only 100 left in the world. That’s down from over 4,500 such securities last year in the Bloomberg Global Aggregate Negative Yielding Debt index, following a surge in yields as investors bet on imminent interest-rate hikes.
• The EU plans to ban Russian crude oil over the next six months and refined fuels by the end of the year as part of a sixth round of sanctions to increase pressure on Vladimir Putin over his invasion of Ukraine
• The ECB should consider raising interest rates as soon as July as inflation accelerates, ERR reported, citing Governing Council member Madis Muller
• North Korea launched what appeared to be a medium-range ballistic missile Wednesday, as Kim Jong Un ramps up his nuclear program ahead of U.S. President Joe Biden’s first visit to Seoul
• Iceland’s central bank delivered its biggest hike since the 2008 financial crisis to try to curb inflation and rein in Europe’s fastest house-price rally. The Monetary Policy Committee in Reykjavik lifted the seven-day term deposit rate by 100 basis points to 3.75%, accelerating tightening with its largest move yet since the pandemic. The increase was within the range of outcomes indicated by recent surveys of market participants

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were cautious amid holiday closures and as markets braced for the incoming FOMC. ASX 200 was rangebound as strength in financials was offset by tech and consumer sector losses. Hang Seng underperformed amid a tech rout and after a wider than expected contraction in Hong Kong’s advanced Q1 GDP, while China’s COVID-19 woes persisted with Beijing tightening its restrictions.

Top Asian News

• Hong Kong Plots Different Covid Path to Xi’s Zero Tolerance
• Beijing Shuts Metro Stations and Suspends Bus Routes
• Didi Leads Slump in U.S.-Listed Chinese Shares Amid SEC Probe
• Record India IPO Opens to Retail Amid Fickle Markets: ECM Watch

European bourses, Euro Stoxx 50 -0.3%, are modestly softer after another subdued but limited APAC handover amid ongoing regional closures. US futures remain in tight pre-FOMC ranges, with participants also awaiting ISM Services and ADP. In Europe, sectors are mostly lower with the exception. US President Biden's administration is reportedly moving towards the imposition of human-rights related sanctions on Hikvision, according to FT sources; final decision has not been taken.

Top European News

• Hungary Voices Objection to EU Sanctions Plan on Russian Oil
• U.K. Mortgage Approvals Fall to 70.7k in March Vs. Est. 70k
• European Energy Prices Jump as EU Proposes Banning Russian Oil
• Boohoo Plunges as Online Clothing Retailer’s Growth Wilts

FX

• DXY anchored around 103.500 awaiting FOMC and Fed chair Powell for further guidance.
• Aussie gets retail therapy and hawkish RBA rate calls to consolidate gains made in wake of 25 bp hike; AUD/USD pivots 0.7100 and AUD/NZD 1.1050.
• Kiwi elevated following NZ labour data showing record low unemployment and strength in wages, NZD/USD tightens grip of 0.6400 handle and closer to half round number above.
• Loonie on a firmer footing ahead of Canadian trade as oil prices bounce, USD/CAD towards base of a broad 1.2850-00 range.
• Indian Rupee rallies after RBI lifts benchmark rate and reserve ratio at off-cycle policy meeting, former up 40 bp to 4.40% and latter +50 bp to 4.50%.
• Euro, Yen and Franc remain in close proximity of round and psychological numbers, circa 1.0500, 130.00 and 0.9800 respectively.
• RBI raises its key repo rate by 40bps to 4.4% in an off-cycle meeting; Also raises the cash reserve ratio by 50bps to 4.5%. Will retain accommodative policy stands but will remain focused on the withdrawal of accommodation.

Fixed Income

• Bonds attempt to nurse some losses before FOMC and a busy agenda in the run up, including ADP, Quarterly Refunding details and the services ISM.
• Bunds back from a 152.44 low to 153.00+, Gilts edging towards 118.00 from 117.55 and 10 year T-note fractionally above par within a 118-17+/06 range.
• German Green issuance well received as cover climbs from prior sale and retention dips, albeit with the average yield sharply higher.

Commodities

• WTI and Brent are bolstered amid the EU unveiling the sixth round of Russian sanctions, seeing a complete import ban on all Russian oil, benchmarks firmer by circa. USD 3.5/bbl
• However, sources indicate that Hungary and Slovakia will receive an extend phase-our period in order to appease their known opposition.
• US Energy Inventory Data (bbls): Crude -3.5mln (exp. -0.8mln), Gasoline -4.5mln (exp. -0.6mln), Distillate -4.5mln (exp. -1.3mln), Cushing +1.0mln.
• India is looking for Russian oil at under USD 70/bbl on a delivered basis in order to compensate for additional components incl. securing financing, via Bloomberg sources; adding, that India has purchased over 40mln/bbl of Russian crude since late-Feb.
• OPEC+ sees the 2022 surplus at 1.9mln, +600k BPD from the prior forecasts, according to the JTC report.
• Several OPEC+ officials expected the current oil pact to continue, according to Argus Media.

US Event Calendar

• 07:00: April MBA Mortgage Applications, prior -8.3%
• 08:15: April ADP Employment Change, est. 382,000, prior 455,000
• 08:30: March Trade Balance, est. -$107.1b, prior -$89.2b
• 09:45: April S&P Global US Services PMI, est. 54.7, prior 54.7
• 09:45: April S&P Global US Composite PMI, est. 55.1, prior 55.1
• 10:00: April ISM Services Index, est. 58.5, prior 58.3
• 14:00: May Interest on Reserve Balances R, est. 0.90%, prior 0.40%
• 14:00: May FOMC Rate Decision; est. 0.75%, prior 0.25%

DB's Jim Reid concludes the overnight wrap

I feel like I aged 20 years after the first half of the Champions League semi-final last night. Luckily the second half was less stressful and Liverpool are through to the final. I don't think I got those 20 years back though.

Talking of age, if you're under 43, did 3 years at university and then joined financial markets then you won't have worked in an era of 50bps Fed rate hikes. This will very likely change tonight as the Fed are a near certainty to raise rates by 50bps. In fact it'll be the first time the Fed have hiked at consecutive meetings since 2006. So we enter a new era that won't be familiar to many.

In terms of what to expect later, our US economists are also calling for a 50bps hike in their preview (link here), which follows the comment from Chair Powell before the blackout period that “50 basis points will be on the table” at this meeting. Looking forward, they further see Powell affirming market pricing that further 50bp hikes are ahead, and our US economists believe this will be the first of 3 consecutive 50bp moves, which will eventually take the Fed funds to a peak of 3.6% in mid-2023. We’re also expecting an announcement that balance sheet rundown will begin in June, with terminal cap sizes of $60bn for Treasuries and $35bn for MBS, with both to be phased in over 3 months. See Tim’s preview on QT (link here) for more info on that as well.

While the Fed might have already begun their hiking cycle 7 weeks ago now, the sense that they’re behind the curve has only grown over that time. For example, the latest inflation data from March showed CPI hitting a 40-year high of +8.5%, meaning that the Fed Funds rate was beneath -8% in real terms that month, which is lower than at any point during the 1970s. Meanwhile the labour market has continued to tighten as well, with unemployment at a post-pandemic low of 3.6% in March, and data out yesterday showed that the number of job openings hit a record high of 11.55m (vs. 11.2m expected) as well. That means the number of vacancies per unemployed worker stood at a record high of 1.94 in March, which speaks to the labour shortages present across numerous sectors at the minute.

Ahead of the decision later on, the S&P 500 surrendered an intraday gain of more than +1% to finish the day +0.48% higher, in another New York afternoon turnaround. Energy (+2.87%) and financials (+1.26%) did most of the work keeping the index afloat after dipping its toes in the red late in the day, while only two sectors ultimately finished lower, staples (-0.24%) and discretionary (-0.29%). A sizable 35 S&P 500 companies reported earnings before the close, but there weren’t any standout results to drive an index-wide response. Indeed, the mega-cap FANG+ index only slightly underperformed the broader index at +0.11%. In Europe the STOXX 600 was up +0.53%, closing before the New York reversal. In line with the turnaround, overall volatility remained elevated, with the VIX index (-3.09pts) closing just below the 30 mark.

Ahead of today’s FOMC decision US Treasuries continued their recent back-and-forth price action. The 10yr yield ended ever so slightly lower at -0.1bps. That masks continued rates volatility, however, with the 10yr as much as -8bps lower intraday after having moved above 3% in the previous session for the first time since 2018. The back-and-forth was matched by real yields, as 10yr real yields were as many as -11bps lower before closing down just -0.1bps, comfortably in positive territory for only the second day since March 2020 at 0.14%. The curve flattened as short-end rates moved higher, with 2yr yields gaining +5.1bps, after most tenors were lower earlier in the session.

In Europe, yields on 10yr bunds moved above 1% in trading for the first time since 2015 shortly after the open. Yields did then swing lower, but subsequently recovered to be down just -0.2bps at 0.961%. However, bunds were one of the stronger-performing European sovereigns yesterday, and the spread of both Italian (+2.2bps) and Spanish (+1.1bps) 10yr yields over bunds widened to fresh post-Covid highs in both cases, at 191bps and 106bps respectively.

Asian equity markets are mixed in a holiday thinned session ahead of the Fed’s key rate decision later. The Hang Seng (-0.90%) is trading in negative territory as a decline in Chinese listed tech stocks is weighing on sentiment. Elsewhere, the Kospi (-0.15%) and S&P/ASX 200 (-0.08%) are fractionally lower. Meanwhile, markets in Japan and mainland China are closed today for holidays. Oil prices are slightly higher amid rising prospects of an EU embargo of Russian crude oil. As I type, Brent and WTI futures are c.+1% up to trade at $106.09/bbl and $103.53/bbl respectively.

Early morning data showed that Australia’s retail sales rose for the third consecutive month, advancing +1.6% m/m in March and going past market estimates for a + 0.5% gain. It followed a +1.8% rise in February.

Looking at yesterday’s other data releases, US factory orders grew by a stronger-than-expected +2.2% in March (vs. +1.2% expected). And over in Europe, German unemployment fell be -13k in April (vs. -15k expected), whilst the Euro Area unemployment rate in March fell to 6.8%, which is the lowest since the single currency’s formation. Finally, Euro Area PPI in March soared to 36.8% (vs. 36.3% expected), which is also a record since the single currency’s formation.

To the day ahead now, and the main highlight will be the aforementioned Fed decision, along with Chair Powell’s subsequent press conference. On the data side, we’ll also get the final services and composite PMIs from around the world, UK mortgage approvals and Euro Area retail sales for March, and US data for the March trade balance, the ISM services index for April, and the ADP’s report of private payrolls for April. Finally, earnings releases include CVS Health, Booking Holdings, Regeneron, Uber, Marriott International and Moderna.