END OF DAY REPORT MAY 31st EQUITIES, FUTURES & OPTIONS

HIGHLIGHTS

Fed Beige Book: Financial conditions were stable or somewhat tighter in most Districts; employment increased in most Districts, though at a slower pace than before; price rose moderately, with inflation slowing in many Districts
Economic activity was little changed overall in April and early May. Four Districts reported small increases in activity, six no change, and two slight to moderate declines. Expectations for future growth deteriorated a little, though contacts still largely expected a further expansion in activity. Consumer expenditures were steady or higher in most Districts, with many noting growth in spending on leisure and hospitality. Education and healthcare organizations saw steady activity on balance. Manufacturing activity was flat to up in most Districts, and supply chain issues continued to improve. Demand for transportation services was down, especially in trucking, where contacts reported there was a “freight recession.” Residential real estate activity picked up in most Districts despite continued low inventories of homes for sale. Commercial construction and real estate activity decreased overall, with the office segment continuing to be a weak spot. Outlooks for farm income fell in most districts, and energy activity was flat to down amidst lower natural gas prices. Financial conditions were stable or somewhat tighter in most Districts. Contacts in several Districts noted a rise in consumer loan delinquencies, which were returning closer to pre-pandemic levels. High inflation and the end of Covid-19 benefits continued to stress the budgets of low- and moderate-income households, driving increased demand for social services, including food and housing.

Fed's Harker (voter) says in the camp that we can 'skip' a meeting, it would be a skip not a pause; a pause says that you may hold there for a while and don't think that we are ready for that This economy keeps chugging along and modal forecast is not for a recession. Fed is committed to getting inflation under control. Unemployment is going to tick up to around 4.4%. 
Inflation is stubborn but likely to come down over time. Labour is driving core services inflation "in my view". Need some slowing in the labour market. Cannot identify a lot of things that have fundamentally changed in the economy due to the pandemic. Not seeing so much a credit crunch as a credit squeeze following SVB. Not seeing a dramatic credit crunch.
 Expects to see bank mergers but not major problems like in the past. When asked about the neutral rate, says the jury is really really out on whether it has changed. Analysis at 12:41 Harker is participating in a fireside chat. These are Harker's first remarks since late April, before the May FOMC, and is the latest voting member to show an appetite for a 'skip

Fed's Jefferson (voter) says holding policy rate constant "at a coming meeting" should not be taken to mean rates have reached a peak for this tightening cycle; skipping hike would allow time to assess data Repeats that monetary policy works with a lag, and a year is not long enough to feel the full effect. 
Base case outlook is not for recession; higher interest rates and lower earnings could 'test the ability of businesses to service debt'. Inflation remains too high and progress by some measures has been slowing. Impact of tighter credit on the economy remains uncertain. Conditions in the banking sector have stabilised and the system remains resilient. Fed staff are working "diligently" on basel III proposal, expected to be issued for public comment soon. Comments are from speech titled 'Financial Stability and the U.S. Economy' 
 The call for a skip in June from Jefferson saw money markets unwind some hawkish bets. Markets are now pricing in a just a 43% probability a 25bps hike vs c 65% probability following the hot JOLTS data earlier. 
The Dollar has seen some weakness as a result while stocks and treasuries have seen some upside in wake of the remarks. DXY fell from 104.63 to 104.51 over the space of 10 minutes. ES (M3) rose from 4184 to 4192. T-Notes (U3) rose from 114.10 to 114.13+ Analysis at 12:29 Timiraos tweets, "Jefferson (the vice chair designate) makes an effort to keep a June skip on the table"

French President Macron has for the first time called for Ukraine to be granted a NATO membership "path" when asked at security conference in Bratislava, Slovakia, according to FT

US Secretary of State Blinken says the US and EU had an intense and productive discussion on AI. EU Competition Commissioner Vestager says within the next weeks we will advance a draft of code of conduct on AI