Asia open: Investors continue to welcome US economy soft landing signs

Markets

US equities were stronger Thursday, with the S&P 500 up 0.9%, led by tech after solid results for a US chipmaker, NASDAQ up 1.7%. However, there were no material updates on debt ceiling negotiations. Still, I suspect investors can at least take some cold comfort that both sides of the aisle remain at the negotiation table as they try to hammer out a deal before the Memorial Day weekend. 

Indeed, US stocks traded higher Thursday, driven almost entirely by a massive gain in the compute brains leader -- NVDA -- following results which highlighted the rapidly evolving and expanding opportunity in Generative AI that appears to be touching vast swaths of the economy -- and will need a lot of CPU power, apparently. It's highly unusual for a single stock to explain a big move in the market, but today is one of them. NVDA shares are up more than 25% today because of a huge beat-and-raise quarter reported Wednesday night. The company guided up 2Q revenue by 53%.

US10yr yields are up 8bps to 3.82% as the cyclical impulses from a revised higher US GDP, likely contributing to another leg higher, and the emerging secular tailwinds of generative AI could also impact rates today. Turning back the clock, the PC ushered in long tails of prosperity in the US -- albeit eventually followed by the Tech Bubble crash of 2000.

Investors continue to welcome signs that the US economy is on a path to a soft landing. 1Q GDP growth was revised up again in the final revision (now +1.3%), and weekly jobless claims that had spiked up a couple of weeks ago are now coming in less than expected again.

Debt limit

At the Asia open, US futures are slightly lower as investors are back on debt limit headline watch. Still, the one issue that could stand in the way of a deal before the US holiday weekend is the widely held belief that markets might need to get worse before politicians feel forced to act.

And it is important to note that the June deadline poses a different risk than the debt limit usually does.

We think lawmakers are treating June 1 as a hard deadline since it is the only specific date the Treasury Congress has to work with. That said, if, as the date approaches, it becomes clear that the Treasury will not be close to depleting funds by June 1, some lawmakers might begin to see the hard deadline as slightly softer. So discussions could drag out despite the probability of a deal priced at over 70%.

Oil

Oil prices are trading lower, with evidentiary discord appearing in the ranks as Russia plays down the prospect of more OPEC+ oil cuts, with Russians and Saudis not singing from the same song page regarding what is needed to backstop oil prices. And as I suggested in our Mid Week Oil Update, we could be nearing that point where the speculator community turns around and dares OPEC to create even more spare capacity than the current 5mm bpd, which could ultimately lead to discord within the ranks of the oil producers group.

From the oil bears' perspective, mounting concerns over the financial sector's health, US debt ceiling risks, fears of an impending demand slowdown in the West, a deflationary funk in China, and the explosive demand for EVs will continue to weigh on demand.

Forex

Since Interbank FX traders, like chess masters, tend to play two moves ahead, in our view, the recent rally in the broad Dollar more appropriately reflects a less dovish realignment of Fed expectations. And for the Euro specifically, we think the recent weakening is consistent with European growth sputtering relative to robust expectations. In contrast, US growth expectations have been revised to be stronger throughout the year. Without more evidence of economic divergence in the Euro area's favour, the EUR/USD could struggle to break higher ground above 1.10 this year.