An S&P 500 correction, or a possible meltdown in Asian currencies, could be brewing. Here’s why.

Sell-in-May started early this year as Tuesday’s brutal yield-driven selloff capped April’s trading, with stocks sputtering ahead of a Fed decision and after disappointment from AI heavyweights.

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Our call of the day from the head of macro research at TS Lombard, Freya Beamish, sees trouble ahead in the form of an S&P 500 SPX correction or possibly an Asian foreign exchange meltdown.

“Something’s got to give in financial markets,” Beamish tells clients in a note, as she flags growing divergences between big economies.

China, the European Central Bank and the Bank of England have been trying to stop the Fed’s fight against U.S. inflation from triggering currency depreciation, she notes. That’s as the Bank of Japan tries to reboot its economy by keeping a lid on interest rates, with yen suffering thus far perhaps not over.

“Depreciation pressure on these currencies will persist until the U.S. moves back toward the sweet spot. Inflation needs to print at 3% not 4% but growth needs to stay resilient enough to support the global recovery narrative,” says Beamish.

One big worry is the U.S. is unraveling in the jobs department. She flags several signals, such as recent data showing a sharp deterioration in hiring plans for smaller companies from the National Federation of Independent Business. Other data shows “12-month expectations of losing a job shot up in the past few months, while the composite employment index on the PMI dropped sharply last month. Several different sources all saying the same thing starts to become a story,” she says.

While the hard data — reminder Friday is big jobs day — is not giving off these clues yet, independently generated surveys that are have “historically have a good record of predicting a downturn in jobs,” she said.

“At this stage, leading indicators suggest a few months of weakness, which could spook markets, but also would lead the Fed to cut, with the economy then recovering rapidly. Asian currencies, however, need U.S. data to come out just right in the next few months, however, to avoid buildingthe pressure on policymakers to go for a step change,” she says.

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For example, “the BOJ better hope that we are right about U.S. inflation printing lower and jobs coming in weaker, though not too weak,” she said. If they’re wrong, Japan policymakers could be moving too slowly on rate hikes.

But also then for the yen, “nobody knows what happens if you raise interest rates in an economy with debt at over 260% of GDP.”

And in China — the PBOC is trying to keep up with the dollar and keep interest rates higher than needed. She said “continued upside surprises in U.S. inflation and demand would mean a crawling and slipping and sliding peg to the dollar as China would not be able to keep pace. The PBOC, therefore, like the BoJ, but for very different reasons, will have to pray for sweet-spot U.S. inflation and activity data in coming months,” says Beamish.

The markets

Stocks DJIA SPX are trading mostly mostly lower, led by tech COMP after big-name earnings disappointment, with Treasury yields BX:TMUBMUSD10Y also falling. Crude oil CL.1 is under pressure, and bitcoin BTCUSD has dropped further.

The buzz

The Fed decision is due at 2 p.m. Eastern, followed by a press conference with Chairman Jerome Powell. The Treasury said it will auction $125 billion in notes and bonds next week, the same as last quarter. The Fed is also expected to slow the pace of its quantitative tightening program, which would come with the Fed statement later.

The private-sector created a bigger-than-forecast 192,000 jobs in April. Elsewhere, data showed construction spending fell by more than forecast, while the Institute for Supply Management’s manufacturing index fell sharply in April, and job openings fell to the lowest in three years. Auto sales are coming in throughout the day.

Weighing on tech is results disappointment from AI favorites Super Micro Computer SMCI and AMD AMD, with those shares down sharply.

Amazon.com AMZN reported a spike in Amazon Web Services revenue, but said consumers are spending less. Shares are up.

Opinion: Nvidia is chip sector’s only hope after AMD and Super Micro disappoint

Elsewhere, Pinterest PINS is soaring on results and guidance. Starbucks SBUX is sliding as revenue took a hit from cautious consumers.

CVS CVS is tumbling after slashing its outlook and an earnings miss, Pfizer PFE reported forecast-beating results and shares are up, Mastercard MA share are down after the credit-card group cut its growth forecast, and Taco Bell-parent Yum Brands YUM is falling on weak results. EBay EBAY, Etsy ETSY, First Solar FSLR and Qualcomm QCOM are coming after the close.

Johnson & Johnson JNJ has revealed its latest plan to settle ovarian cancer talc claims.

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The chart

Stocks do provide some protection against inflation. Here’s a chart from Goldman Sachs, charting sales growth versus core CPI, since 1968. The orange dots are readings since 2021. Strategists led by Peter Oppenheimer say the relationship between bond yields and equities depends not just on the level of yields, but also the point of the cycle, the speed of adjustment, the valuation of equities and the drivers of the yield rise. The conclusion? With the 10-year BX:TMUBMUSD10Y near 5% and high equity valuations, stock markets are vulnerable to further rises in bond yields, though less so than the past because of the very large and profitable companies that have strong balance sheets.

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