Indices roll over on Recession Fears, Gold sparkles

Wall Street enjoyed “risk-on” sentiment this morning as regional bank shares stabilized, but stocks turned lower by midday on weaker consumer sentiment data released today, and weak economic data out of China, rekindled recession fears. Gold and the Dollar stood out as the safe haven assets.

Consumer sentiment dips, hinting at a self-fulfilling recession

Consumer sentiment tumbled in today's University of Michigan (UoM) survey consumer sentiment data release, signaling escalated worries about the economy amid an increase in headlines about regional bank failures and the debt crisis standoff in Washington. Current economic data confirms that we are not in a recession, but that's all that consumers have heard for the past year – and this might become a self-fulfilling recession. Consumer sentiment had been trending higher off its historic low set last June, but it has now erased more than half of those gains, providing an additional argument for at least a pause in the Federal Reserve's rate hikes, as a slowdown in consumer spending would help to lower inflation

Consumer sentiment data

• The UoM consumer sentiment index tumbled 9% to 57.7 in today's preliminary data release
• Year ahead expectations for the economy fell by 23% this month, a major decline
• Long-run expectations fell by 16%, suggesting that consumers fear that the anticipated recession will be will not be short
• Year-ahead inflation expectations ticked slightly lower to 4.5% in May, down from 4.6% in April
• Long-run inflation expectations rose to 3.2%, up from 3.0% in April and their highest level since 2011

Indices and Regional Banks slide, Dollar rallies

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were down by 0.6%, 0.9% and 0.6%
• The KBW Regional Bank Index continued to trek down, falling 1.6% this morning
• The dollar index edged up 0.7% to 102.5, sticking above its long-term support level, with and Dollar/Sterling and Euro/Dollar off by 0.5% and 0.4% respectively
• Yields on 2- and 10-year Treasuries fell to 3.44% and 3.975%, respectively

Gold holds above 2K mark

• Gold prices were unchanged at $2,018 per ounce, reflecting their new-found safe haven status
• Crude oil prices fell 0.7% to $70.4 per barrel
• The grain and oilseed markets are mixed to firm ahead of today’s highly anticipated USDA crop report, with little movement in corn and soybean prices

China’s sluggish recovery becomes more evident

• New loans in China fell sharply in April to Yuan 718.8 billion, only about half the total expected, according to the People’s Bank of China
• The steep decline in loan growth signals a reluctance to invest in this time of uncertainty, spelling trouble for China’s economy
• Sharp declines in loans to both corporations and in residential lending reflected the broad weakness in China’s economy, and possible more significant problems continuing in China’s property sector
• Pressures are growing for China to initiate a more significant stimulus program, but that could significantly devalue the Yuan at a time when the Dollar and Euro are stronger due to our monetary tightening
• The bottom line is that the Chinese people do not have confidence in China’s economy, and the timing is very poor for the government to initiate stimulus, while trying to prop up the yuan at a time when it is trying to move the world toward favoring this currency over the dollar

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com