A daily market update from FS Insight — what you need to know ahead of opening bell

“Find a need and fill it… nothing is impossible.” — Henry J. Kaiser

Overnight

U.S. PPI fell to 2.2% YoY, its lowest since October (CNBC)

U.S. weekly jobless claims hit a ten-month high (RT)

Yellen sees U.S. job market resembling pre-Covid environment (RT)

Fiera CEO says BoC has clear path to 3% interest rate (BBG)

European CLO issuance hits record rate as investors chase yields (FT)

Private lenders storm public bond markets at record-setting pace (BBG)

E.U. bonds fall after MSCI declines to include them in sovereign debt indices (FT)

Why bond markets are so spooked by the French election (FT)

G7 strikes ‘provisional’ deal on $50bn loan to Ukraine (FT)

U.S. and allies scrounge for Patriots – or any air defenses – to help Ukraine (WSJ)

Bank of Canada official says QE helped lift growth by as much as 3% (WSJ)

Canada’s parliament grills bank CEOs on climate policy in rare meeting (RT)

Adobe jumps ~15% on a Q2 beat-and-raise driven by early monetization of AI functionality across its flagship applications (CNBC) 

Elon Musk’s $56 billion pay package, reincorporation in Texas, approved by Tesla shareholders (MW)

Roaring Kitty ditches GameStop options, commits to a $262 million stake (Barron’s)

BlackRock launches five climate-focused iShares ETFs (IW)

A longtime ambition – an IPO of the Tokyo Metro, a national treasure – risks facing a shift in shareholder priorities (FT)

Argentina inflation fell for a fifth-straight month in May (YH)

Argentina’s Javier Milei wins senate approval for economic reforms (FT)

Supreme court sides with Starbucks in challenge to Labor Board (WSJ)

A major Segantii insider trade was probed by U.S. in 2018 (FT)

Goldman to double lending to UHNW wealth clients (RT)

Private bank Edmond de Rothschild is expanding into Saudi Arabia (RT)

Ransomware attacks surge after $22M UnitedHealth Group ransom (AX)

Worker dissatisfaction gap is growing between young and old workers (BBG)

Executives from ADHD startup arrested, charged with fraud (WSJ)

A New York developer binged on trophy properties; his wager is flailing (WSJ)

From dying mall brand to Wall Street darling, Abercrombie & Fitch is retail’s biggest comeback (CNBC)

How AI may become the new offshoring (FT)

OpenAI expands lobbying team to influence regulation (FT)

Apple sued by employees alleging unequal pay for women (WSJ)

Microsoft grilled on Capitol Hill over security failures (WSJ)

Microsoft feels the heat in Europe (FT)

Pfizer failure in Duchenne muscular dystrophy trial leaves field open for a rival (Barron’s)

“Gensler will be gone”; why Democrats are coming aboard the crypto train (MW)

Russia halts foreign exchange trading as U.S. sanctions sow confusion (FT)

U.K. imposes sanctions on Russian insurer protecting shadow fleet of tankers (FT)

Chinese trader’s $20 million pile of Russian copper goes missing (Mining)

Senegal’s first offshore project expected to produce 100,000 barrels of oil per day (Semafor)

Wells Fargo fires over a dozen for ‘simulation of keyboard activity’ (BBG)

Footballers launch legal action against FIFA over workload and Club World Cup (FT)

Chart of the Day

MARKET LEVELS

MORNING INSIGHT

Good morning!

This week, 3 macro reports point tto a significant stepdown in inflation, underscoring our base case that inflation is tracking lower than the consensus (and Fed) realize. Yet the data has been so favorable (lower inflation) that the Fed and markets are expressing some level of skepticism that this drop in inflationary pressures in May is genuine.

• The 3 favorable bits of inflation data (we wrote about them this week) are:
  – NY Fed survey shows U.S. consumer inflation expectations are back to pre-pandemic levels = good
  – May Core CPI came in at +0.16% MoM, half of April’s level, and a lot lower vs consensus
  – May Core PPI came in at zero vs +0.26% consensus
• Collectively, this shows that inflation’s trajectory in May descended at a faster pace than the stepdown seen in April. And together, this essentially argues that the Jan to Mar relatively “hot” inflation figures were an anomaly.

Click HERE for more.

TECHNICAL

As we’ve mentioned repeatedly in recent weeks, this Equity surge has proven impressive, but much of the credit goes to Technology and Technology alone, while many other sectors have not only failed to participate, but, in some cases, have declined.

In Equal-weighted terms, 7 of the 11 sectors that represent the S&P 500 were down over the last month, and six of those have been negative on a 3-month basis. This is quite unusual given that SPX and QQQ have pushed back to new all-time highs in resilient fashion. On a cap-weighted basis, when examining the Sector SPDR ETFs, that number is five sectors on both a 1 and 3 month basis, which have shown negative returns: REITS, Consumer Discretionary, Healthcare, Materials, and Financials.

Note that this isn’t a bearish omen necessarily – for one simple reason: Technology continues to outperform and has broken out yet again vs the S&P 500, on a relative basis, back to new all-time highs. Until/unless Technology starts to wane and turn lower, it’s arguably right to still trust this market despite the lack of participation from other groups. 

Click HERE for more.

CRYPTO

Microstrategy has proposed a $500 million convertible senior note offering, with an option to raise an additional $75 million. The notes will be due in 2032 and are convertible into cash, MSTR 9.62%  class A common stock, or a combination of the two. The funds will be used to acquire additional bitcoin and for general corporate purposes. Microstrategy’s current holdings include 214,400 BTC, at an average cost of $35,180, totaling over $14 billion at today’s prices. Microstrategy also disclosed the redemption of $650 million of its 2025 convertible senior notes. The notes are convertible at any time prior to July 15^th at a conversion price of $397.99 per share. Microstrategy’s shares are trending downwards with Bitcoin today, having fallen 6.20% at the time of writing.

Terraform Labs, the development company of the failed algorithmic stablecoin UST, agreed to a settlement with the SEC for $4.47 billion. The penalties include $3.58 billion in disgorgement, a $420 million civil penalty, and bar Do Kwon from ever serving as a director or officer of any public company. Chris Amani, CEO of Terraform Labs, announced intentions to dissolve the company, burn any unvested Luna tokens in the company’s wallets, and sell ecosystem projects like Pulsar Finance, Station Wallet, and Enterprise DAO. Additionally, a community proposal will offer the network up to other development teams if they are interested in keeping the network running. Amani suggested a new decentralized governance model could serve as a framework for troubled projects in the future. The LUNA 0.51% and LUNC 3.19% tokens have both dropped more than 7% today after the news of the dissolution plan.

Click HERE for more.

FIRST NEWS

Positive Externalities Dept. British pundits — and even a few American ones — continue to eviscerate Biden’s tariffs on Chinese products while ignoring the central rationale behind these measures. Searching their invectives for words such as military, defense, and national security turns up nothing. Cruel though it may seem – as they hardly address the most important rationale behind these tariffs, their arguments against them can hardly be taken seriously.

And yet, there’s an overlooked part of the story of these tariffs that their critics are missing. Tariffs in this case would provide a sizable incentive for production to exit China. We know what you’re thinking – will it move to the U.S., then? Well, that’s the thing: it’s a wide world out there. Instead, it will likely move to developing countries: India, Mexico, Vietnam, Indonesia, the Philippines, et al. Arvind Subramanian, a development economist, writes:

“What is often missing from the debate about the escalating rivalry between the United States and China is the perspective of other countries, especially larger developing economies. After all, these tariffs are not just protectionist, but also discriminatory…[T]oday’s tariffs are being imposed on imports from perceived adversaries like China, redirecting economic activity toward third-country suppliers considered allies…

India offers a prime example. It has successfully attracted several Western firms exiting China since launching its “China Plus One” strategy in 2014. Notably, Apple has significantly expanded its iPhone manufacturing operations in India, and Tesla reportedly may follow suit… If India can establish a supply chain that is largely independent of China – a trend that is slowly underway in the electronics sector – it could gain a competitive advantage over China and countries linked to it…

[T]he greater the overlap between America’s strategic interests and third countries’ capabilities and comparative advantages, the more likely that discriminatory protectionism will be long-lasting and provide certainty to investors seeking to diversify away from a ruthlessly efficient China.”

It may be that, right as he is, Subramanian is not going far enough. He focuses on Western companies moving production out of China, and thus argues that countries like Vietnam and Indonesia, whose supply chains happen to be more integrated with China’s, will benefit less. But this ignores the possibility that these countries will benefit from Chinese companies moving production out of China.

That’s right.

Biden’s new tariffs are hitting China only for now. Thus, if Chinese companies (say, BYD) build factories in Vietnam, they can circumvent the tariffs. Eventually the U.S. might plug that loophole. In the meantime, there’s a big incentive for Chinese companies build factories in other countries – and this is precisely what they’re doing:

^Source: FT

Yet Chinese companies are investing in India, too, despite worries that, in the long term, this will help India become an economic rival to China. They’re doing it because short-term individual incentives trump long-term nationalist concerns.

Even if one sets aside the national-security aspect of it, it should be clear that companies shifting production from China to India, Vietnam, Indonesia, et al. constitutes a smart move. Why? These countries are much poorer than China, and so need the growth much more than China does:

In the end, both Western and Chinese companies moving factories to a new round of developing countries is just another instance of the old ‘flying geese’ theory of development – a model of the international division of labor in East Asia based on the concept of dynamic comparative advantage. The idea is that Asian nations will catch up with the West via a regional hierarchy in which the production of commoditized goods continuously moves from the more advanced countries to the less advanced ones.

In this case, it seems the geese needed an extra push to get them out of China. U.S. tariffs seem to be providing that push, and the less advanced countries out there are benefiting as a result. NoahPinion