MNI ASIA OPEN: ISM Services Misses But Not Signalling Recession

NEWS

North America

US (MNI): MNI INTERVIEW: Service Slowdown Does Not Signal Recession-ISM
U.S. services growth slowed in March and prices paid remained elevated but the economy should be able to skirt recession, particularly if the Federal Reserve changes its mind and starts cutting interest rates later this year, Institute for Supply Management services chair Anthony Nieves told MNI Wednesday.

US (MNI): MNI INTERVIEW: Fed Not Done Hiking Despite Bank Pain-Cecchetti
The Federal Reserve will need to raise interest rates further to ensure that inflation returns to its 2% target, but financial sector turmoil will probably flare again, tightening financial conditions and keeping the rate cycle peak lower than otherwise, former BIS advisor and New York Fed staffer Stephen Cecchetti told MNI.

US/TAIWAN (WPT): Taiwan’s President Meets With McCarthy After Warnings From China
Speaker Kevin McCarthy (R-Calif.) and a bipartisan group of House lawmakers are meeting with Taiwanese President Tsai Ing-wen Wednesday as she winds down her trip to the U.S. amid escalating tensions between the two democracies and China.

POLITICS (MNI): Key White House Aide Departs As Biden Restructures Economic Team
Assistant Secretary for Economic Policy at the Treasury Department, Ben Harris,one of President Biden's closest economic advisors, has left the TreasuryDepartment after four years in Biden's inner circle.

BANKS (BBG): Western Alliance Pares Decline After Updating Deposit Data
Western Alliance Bancorp pared earlier declines after saying deposits fell 11% in the first quarter to $47.6 billion, a smaller drop than some analysts had estimated. The disclosure eased concern about a statement from the company on Tuesday that failed to update the deposit figure. Deposits balances have increased this month, cutting this year’s decline to 9%.

CANADA (BBG): RBC’s CEO Sees Banking System as Stable Without ‘Full Rewiring’
Rising interest rates have brought down several lenders that made bad bets, but the worldwide banking system is in generally good shape, Royal Bank of Canada Chief Executive Officer Dave McKay said. Despite those lender [SVB and Signature] failures, “our clients and communities can rest assured that the banking system is stable and resilient,” McKay said Wednesday. As for his company, “we are extremely confident in our bank’s financial and strategic strength, our stability and our ability to manage risk and capital.”

Europe

EU (MNI): Brussels Toughens Up Fiscal Rules Proposals - Officials
The European Commission has briefed senior member state finance officials about suggested amendments to its November 2022 proposals for reform of the bloc’s fiscal rules, which would take a stricter approach to deviations from limits on public debt and borrowing than initially planned, European officials told MNI.

NGEU (MNI): Spain, Italy Discuss Joint Push For NGEU Extension-Source
Italian Prime Minister Giorgia Meloni and Spain’s Pedro Sanchez discussed whether they should make a joint push to extend the EUR800 billion NextGenerationEU programme beyond 2026 during their meeting in Rome on Wednesday, a source from the Spanish delegation told MNI.

Switzerland (BBG): Switzerland to Cancel, Cut Top Credit Suisse Executives’ Bonuses
Swiss Federal Council instructed the Federal Department of Finance (FDF) to cancel, or reduce by 50% or 25%, all outstanding variable remuneration for the top three levels of management at Credit Suisse, according to statement.

ITALY (BBG): Former Italian Premier Berlusconi in Intensive Care in Milan
Former Italian Prime Minister Silvio Berlusconi has been hospitalized in intensive care in Milan, according to one person familiar with the situation. The 86-year-old media tycoon is in stable condition at the San Raffaele hospital, news agency Ansa reported on Wednesday. Berlusconi was already hospitalized for routine checks last month.

Global

OIL (BBG): Saudi Arabia Hikes Light Oil Price to Asia by 30c/Bbl for May
Saudi Arabia hiked official selling prices for all of its oil sales to Asian customers in the month of May after the kingdom led a surprise OPEC+ output cut.

DATA

**MNI: US MAR SERVICES PMI 52.6; FLASH 53.8 FEB 50.6
US ISM MAR SERVICES PRICES 59.5
US ISM MAR SERVICES NEW ORDERS 52.2
US ISM MAR SERVICES EMPLOYMENT INDEX 51.3

**MNI: US FEB TRADE GAP -$70.5B VS JAN -$68.7B

**MNI: CANADIAN FEB TRADE BALANCE CAD +0.4 BILLION
CANADA REVISED JAN MERCHANDISE TRADE BALANCE CAD +1.2 BLN

US DATA: ISM Services New Orders and Prices Tumble

• Big miss for ISM services, falling to 51.2 in March (cons 54.4) after two surprisingly strong 55 readings and in turn is consistent with much more tepid, but still positive, real GDP growth.
• Particularly large decline in new orders (52.2, -10.4pts). The series has been particularly volatile in the past few months so it’s still above the 45.2 in Dec but otherwise the lowest since Dec’13 outside of two months in the pandemic.
• It's led by new export orders tumbling to 43.7 (-18.0pts), exceeding the -17.4pts from Oct for the largest monthly decline since at least 2000.
• Prices paid (59.5, -6.1pts) see their largest decline since May’17 to leave them at the lowest since Jun’20.
• Ahead of payrolls, employment (51.3, -2.7pts) unwinds most of the surprise strength in Feb with its third largest decline of the past year.

CANADA DATA: Service Normalisation Weighs On Goods Trade Surplus

• The merchandise trade surplus was smaller than expected in Feb at C$0.42B (cons 1.7B) after a downward revised 1.2B (initial 1.92B), with downward pressure coming from the non-energy balance.
• It leaves a 3-month annualized goods surplus at roughly 0.7% GDP, but it continues to be more than outweighed by a post-pandemic normalising service deficit of -1.3% GDP -- the 3-mth av was pushed lower by a small Dec reading, with the Feb deficit the largest in C$ terms since Mar’20.
• The combination leaves a goods & service surplus of -0.6% GDP on the same three-month basis, off recent lows of -1% GDP in late 2022 but with near-term momentum potentially heading lower.

US TSYS: Treasuries Pare Gains But Softer Data Still Set The Tone

• Front end Tsys have seen a sizeable paring of gains through the session, with the 2YY of 3.786% off a fleetingly touched low of 3.642% after the ISM Services miss. It has now even unwound some of the initial rally on weaker ADP employment but yields are still 4bps lower on the day.
• 2s10s are back near the lower end of the day’s range at -49bp, with very brief post-ISM highs of -37bp and lows of -52bps prior to the US coming in.
• TYM3 at 116-15+ remains off earlier highs of 116-30 having got close to the bull trigger at 117-01+ (Mar 24 high).
• A similar story in near-term rates space, unwinding earlier declines but still down on the day: Fed Funds imply 10bp hike for May FOMC, before 39bp of cuts from current effective to 4.44% (-7bps) and 78bp of cuts to 4.05% year-end (-8bp).
• Bullard (non-voter) set to discuss the economic outlook with text + Q&A tomorrow

EGBs-GILTS CASH CLOSE: Morning Selloff, Afternoon Rally... Again

Bunds and Gilts strengthened again Wednesday, and for the third session in a row, an early sell-off reversed in the afternoon on weaker-than-expected US data.

• Core European FI sold off early on strong eurozone data including Spain/Italy Service PMIs and German factory orders.
• But as with Monday's soft ISM Manufacturing and Tuesday's disappointing US JOLTS data, today's dovish catalysts were US ADP private payrolls and ISM Services, both boosting the US slowdown narrative and adding to expectations of near-term Fed rate cuts.
• European rates responded in kind, with pronounced bull steepening in the German curve as ECB terminal hike pricing pulled back (down 6bp on the day).
• That contrasted with stubborn BoE pricing, which was basically unchanged. The UK curve twist steepened modestly.
• BTPs outperformed, with spreads falling sharply into the cash close after having earlier widened post US ISM data.
• The holiday-shortened trading week ends Thursday with German industrial production and a French OAT auction.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 7.7bps at 2.524%, 5-Yr is down 6.4bps at 2.178%, 10-Yr is down 6.7bps at 2.182%, and 30-Yr is down 7bps at 2.266%.
• UK: The 2-Yr yield is down 1.2bps at 3.341%, 5-Yr is down 1.8bps at 3.256%, 10-Yr is down 0.6bps at 3.428%, and 30-Yr is up 2.1bps at 3.772%.
• Italian BTP spread down 3.3bps at 183.3bps / Spanish down 0.4bps at 102.7bps

FOREX: Pressure On Equities Boosts USD, Lower Core Yields Bolster JPY

• Despite the immediate greenback dip on the lower-than-expected US ISM Services PMI data, the subsequent dent to risk sentiment provided support for safe-haven currencies and saw the USD index edge higher throughout US trade. The index has risen 0.36% on the session and has now reversed the post-JOLTS data declines from Tuesday.
• Additionally, further bull steepening in the US yield curve bolstered the Japanese Yen, which saw solid demand against non-usd G10 currencies.
• In particular, AUDJPY and EURJPY are showing losses of around 1%. The former can be explained by the residual bearish sentiment following the RBA’s unchanged decision while EURJPY’s fresh weakness has built momentum with EURUSD trading back below the prior tech resistance at 1.0930.
• Last Friday, EURJPY made a small marginal high above the March 2 high at 145.57 but price has since seen a substantial reversal to the downside. On the downside, initial firm support is seen at 142.84, the 50-day EMA which has briefly been tested today and a weekly close below this average would be considered a bearish development.
• Both SEK and NOK were notable underperformers, both falling over 1.2% against the greenback, consolidating early losses, that appear technically driven, throughout the US trading session.
• German IP and Canadian jobs data are the highlights on Thursday. Focus then turns to US non-farm payrolls on Friday ahead of the holiday weekend, where consensus is currently looking for a +240k print and average hourly earnings of +0.3% M/m.

FX OPTIONS EXPIRY: For Tomorrow

Of note:
USDCAD 3.53bn at 1.3430/1.3455.
AUDNZD 1.09bn at 1.0650 (Tue).

• EURUSD: 1.0875 (861mln), 1.0895 (282mln), 1.0900 (221mln), 1.0915 (301mln), 1.0920 (473mln), 1.0950 (490mln), 1.1000 (255mln).
• USDJPY: 130.00 (740mln), 130.50 (578mln), 131.00 (682mln).
• USDCAD; 1.3430 (893mln), 1.3435 (905mln), 1.3455 (1.73bn).
• AUDUSD: 0.6725 (648mln).

US STOCKS: ADP & ISM Misses Weigh But Banks Move More Firmly Off Early Lows

• Similar to the retracement in US FI, the S&P E-mini has pulled back off earlier lows, having dipped just below 4100 but remains -0.4% on the day (currently 4112) with weaker economic data in ADP employment and ISM services casting its shadow.
• It began to more closely eye support at 4078 (Mar 31 low) with more sustained pressure potentially ultimately seeing focus shift to the 50-day EMA of 4036.58, whilst resistance remains at 4171.75 (Apr 4 high).
• Nasdaq sees larger losses (-1.2%) whilst banks also remain under pressure but are off earlier lows, with the KBW index -0.8% and regionals -1.1% on the day. On banks, Western Alliance released a deposits update (having spooked markets earlier with no details), showing a 11 drop in Q1 but with subsequent stabilisation and increase since Mar 20.
• North of the border, the TSX e-mini is broadly tracking in line with ESA, -0.5% on the day.

COMMODITIES: Gold Holds Onto Yesterday’s Surge Despite Stronger USD

• Crude oil edge to a small loss for their first in five sessions, in what was ultimately a relatively tight range but still broadly consolidates the adjustment higher since the OPEC+ surprise cut announcement at the weekend.
• The net declines came despite EIA weekly oil data showing a larger than expected draw in US crude, gasoline and distillate inventories. Crude stocks drew with higher exports and despite higher imports and an unexpected dip in refinery utilisation.
• WTI is -0.3% at $80.44, leaving technical levels untested with resistance at $81.81 (Apr 4 high) and support at $77.60 (23.6% retrace of Mar 20 – Apr 3 rally).
• Brent is -0.1% at $84.83, also leaving resistance at $86.44 (Apr 3 high) and support at $82.57 (23.6% retrace of Mar 7 – Apr 3 uptrend).
• Gold is +0.1% at $2022.08, whipping around various US data releases but ultimately holding onto yesterday’s surge despite the DXY pushing higher. A high of $2031.88 pushed closer towards next resistance at $2034.0 (2.00 proj of Sep 28-Oct 4 rally from Feb 28).