Stocks Set to Open Lower as Investors Await Powell Testimony, China’s Rate Cut Disappoints

September S&P 500 futures (ESU23) are down -0.48%, and September Nasdaq 100 E-Mini futures (NQU23) are down -0.53% this morning as concerns over the Chinese economy weighed on risk appetite, while investors looked ahead to testimony from Federal Reserve Chair Jerome Powell for more cues on the U.S. central bank’s rate outlook.

In Friday’s trading session, the tech-heavy Nasdaq 100 underperformed major benchmarks, pressured by a drop in chip stocks after Micron Technology (MU) warned that about half of its China customer revenue is at risk of being lost. Regional bank stocks also lost ground, weighed down by an over -1% drop in Zions Bancorporation (ZION) after Janney Montgomery Scott downgraded the stock to Neutral from Buy. In addition, Walt Disney (DIS) fell more than -1% and was the top percentage loser on the blue-chip Dow after the company said CFO Christine McCarthy would step down on account of a family medical leave of absence. On the positive side, Virgin Galactic Holdings Inc (SPCE) surged over +16% after the company announced it would start commercial spaceflight operations this month.

Data on Friday showed that the University of Michigan’s gauge of consumer sentiment rose to a 4-month high of 63.9 in June, stronger than expectations of 60.0. In addition, the University of Michigan’s June year-ahead inflation expectations fell to a 2-year low of +3.3%, much lower than the expected +4.4% figure.

“Sentiment is improving, albeit at still-depressed levels. We think the bigger story in the University of Michigan survey is the fact that inflation expectations are rolling over,” said Tim Quinlan, a managing director and senior economist at Wells Fargo.

Richmond Fed President Thomas Barkin said on Friday that the Federal Reserve might need to tighten monetary policy further to reduce inflation and slow a resilient U.S. economy and labor market. Barkin also cautioned that prematurely ceasing interest rate hikes could potentially result in elevated inflation in the future. “If you back off inflation too soon, inflation comes back stronger, requiring the Fed to do even more, with even more damage,” he said. 

Meanwhile, U.S. rate futures have priced in a 74.4% probability of a 25 basis point rate increase and a 25.6% chance of no hike at next month’s policy meeting.

In other news, U.S. Secretary of State Antony Blinken held a meeting on Monday with Chinese President Xi Jinping and stated that the United States and China had made “progress” in redirecting their relationship back on a positive trajectory as both sides agreed on the need to “stabilize” the significantly strained U.S.-China ties.

In the coming week, investors will be monitoring a spate of economic data, including the U.S. Existing Home Sales, Current Account, Initial Jobless Claims, Crude Oil Inventories, S&P Global Composite PMI (preliminary), Manufacturing PMI (preliminary), and Services PMI (preliminary).

Also, investors will focus on Congressional testimony from Federal Reserve Chairman Jerome Powell for fresh clues on the Fed’s next move. Mr. Powell will be testifying before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. Powell’s testimony will supplement the release of the Fed’s semi-annual monetary policy report.

In addition, several Fed officials will be making appearances in the next few days, including St. Louis Fed President James Bullard, New York Fed President John Williams, Chicago Fed President Austan Goolsbee, Fed Governor Christopher Waller, Fed Governor Michelle Bowman, Cleveland Fed President Loretta Mester, Richmond Fed President Thomas Barkin, and Atlanta Fed President Raphael Bostic.

Today, all eyes are focused on the U.S. Building Permits preliminary data in a couple of hours. Economists, on average, forecast that May Building Permits will stand at 1.425M, compared to the previous value of 1.147M.

Also, investors are likely to focus on U.S. Housing Starts data, which was at 1.401M in April. Economists foresee the May figure to be 1.400M.

In the bond markets, United States 10-Year rates are at 3.797%, up +0.67%.

The Euro Stoxx 50 futures are down -0.39% this morning as a modest interest rate cut by China failed to boost investor sentiment, while a profit warning from Lanxess AG also curbed risk appetite in the region. Data on Tuesday showed that German producer prices rose at their slowest pace in more than two years in May. Chemical stocks are under pressure today, with Lanxess Ag (LXS.D.DX) plunging over -17% after the company cut its second-quarter and annual core profit forecasts. Meanwhile, the Bank of England is scheduled to announce its interest rate decision on Thursday, with economists expecting a quarter-point rate increase as inflation continues to run at more than four times its target. 

Germany’s PPI and Eurozone’s Current Account data were released today.

The German May PPI has been reported at -1.4% m/m and +1.0% y/y, weaker than expectations of -0.7% m/m and +1.7% y/y.

Eurozone April Current Account stood at 4.0B, weaker than expectations of 27.3B.

Asian stock markets today settled mixed. China’s Shanghai Composite Index (SHCOMP) closed down -0.47%, and Japan’s Nikkei 225 Stock Index (NIK) closed up +0.06%.

China’s Shanghai Composite today closed lower as concerns over the country’s slowing economic growth outweighed an interest rate cut by the central bank. The People’s Bank of China trimmed two key benchmark lending rates for the first time in 10 months Tuesday to shore up a slowing economic recovery, with its one-year loan prime rate, which serves as a benchmark for corporate loans, lowered by 10 basis points to 3.55% and the five-year LPR, which is used to price mortgages, reduced by the same margin to 4.20%. However, shares of Hong Kong-listed property stocks tumbled on Tuesday as China’s easing was not as large as expected, with Country Garden Holdings plunging over -6%. Technology stocks also retreated, with Alibaba Group Holding Ltd dropping more than -1% following the surprise replacement of its chief executive and chairman. Meanwhile, the economic outlook for China continues to appear gloomy. Goldman Sachs on Sunday slashed its forecast for China’s GDP growth this year to 5.4% from 6.0%.

“The market was hoping to get a 15-bps cut to the 5-year LPR for any signal of stronger support to the property market,” said Redmond Wong, a strategist at Saxo Capital Markets. 

At the same time, Japan’s Nikkei 225 Stock Index reversed earlier losses and closed marginally higher today. Mitsubishi Corp rose over +3%, leading trading houses higher after Warren Buffett’s Berkshire Hathaway said Monday that its unit National Indemnity increased its passive stakes in five Japanese trading houses to over 8.5% each, excluding treasury stock. On the negative side, Sompo and Tokio Marine plunged more than -5% after local media reported Monday that Japan’s FSA requested the companies and two other insurers to provide detailed information regarding suspected pre-adjustment of fire-insurance premiums. The Nikkei Volatility, which takes into account the implied volatility of Nikkei 225 options, closed down 1.01% to 20.53.

The Japanese April Industrial Production came in at +0.7% m/m, stronger than expectations of -0.4% m/m.

Pre-Market U.S. Stock Movers

U.S.-listed Chinese stocks are moving lower in pre-market trading after China’s central bank cut benchmark lending rates less than expected. As a result, PDD Holdings (PDD) and JD.com (JD) are down about -4%.

Universal Stainless & Alloy (USAP) climbed about +3% in pre-market trading after KeyBanc upgraded the stock to Overweight from Sector Weight.

Beam Global (BEEM) tumbled more than -7% in pre-market trading after signing a binding letter of intent to acquire European-based Amiga DOO Kraljevo. The company also announced the pricing of an upsized $22.5 million underwritten public offering of its common stock.

Gates Industrial Corporation plc (GTES) slid over -2% in pre-market trading after Goldman Sachs downgraded the stock to Neutral from Buy.

Philip Morris International Inc (PM) rose more than +1% in pre-market trading after Citi upgraded the stock to Buy from Neutral with a price target of $117.00.

Palantir Technologies Inc (PLTR) fell over -3% in pre-market trading after Raymond James downgraded the stock to Outperform from Strong Buy.

You can see more pre-market stock movers here

Today’s U.S. Earnings Spotlight: Tuesday - June 20th

FedEx (FDX), Korn Ferry (KFY), La-Z-Boy (LZB).

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