MNI EUROPEAN MARKETS ANALYSIS: USD Higher Across The Board, China/HK Equities Continue To Weaken

US TSYS: Curve Bear Flattens In Asia

TYM3 deals at 113-04, -0-09+, a touch off the base of the 0-09+ range on volume of ~146k.

• Cash tsys sit flat to 3 bps cheaper across the major benchmarks, the curve has bear flattened.
• Early in the session Tsys briefly extended higher before paring gains as Fitch placed the US on negative ratings watch as the deadline for an increase in the debt ceiling approaches.
• Tsys were pressured after a statement from the US Treasury noting that the Fitch report shows the swift need for bipartisan action. They also said that brinkmanship over the debt limit does serious harm to business, raises short term borrowing costs and threatens the credit rating of the US.
• TYM3 briefly dealt below support at 113-04, the low from 23 May. The next downside support level is 112-30 61.8% retracement of Mar-24 rally.
• Fedspeak from Atlanta Fed President Bostic crossed, he noted that data will be guiding the Fed on future rate decisions and that it doesn't want to get locked into a particular move.
• In Europe today we have the final read of German GDP, further out a slew of US data crosses including Q1 GDP, Initial Jobless Claims and Pending Home Sales. Fedspeak from Richmond Fed President Barkin and Boston Fed President Collins will cross. We also have the latest 7 Year Supply.

US: Fitch Puts US On Negative Ratings Watch

Fitch has placed the US on negative ratings watch, as the deadline for an increase in the debt-ceiling approaches (June 1) and they see US governance as weaker than other AAA rated nations. While the ratings agency sees the probability of default as “very low”, it would reduce the US to AA- in the case that it occurs (in line with Ireland and South Korea).

• Fitch is forecasting a deficit of 6.5% of GDP in 2023 widening to 6.9% in 2024. They note that public finances in the US have “modestly underperformed expectations”.
• A deal is still expected before the end of the month and while brinkmanship in debt-ceiling negotiations is not unusual, it does increase the risks. Increased political partisanship in the US is not helping the situation.
• For the initial market reaction to the news see Risk Appetite Weakens As Fitch Places US On Negative Rating Watch and for the comments following the last Biden-McCarthy meeting see Debt: No Agreement Yet, But Talks Continue.

FED: Atlanta Fed’s Bostic Doesn’t See Easing Talk Until Well Into 2024

Atlanta Fed’s Bostic has just given an interview and made it clear that the inflation goal has yet to be met. While he is an alternate member this year, he joins the FOMC in 2024. If his sentiments are shared by the current committee members, then the June and July meetings are still live and the market’s expectation of a rate cut by year end is premature.

• Bostic said that the best case is that the Fed won’t consider rate cuts until well into 2024. He also commented that the data will be guiding the Fed on future decisions and as such that it doesn’t want to be locked into a “particular rate move”.
• The US is not yet close to the inflation goal and so the Fed should stay focussed on what it is aiming to achieve. He expects that there will be some labour stress as inflation moderates, but that is less problematic to the economy than not getting inflation back down to 2%.

JGBS: Futures At Cheaps, Weighed By 40-Year Supply

JGB futures are 148.44, -17 versus settlement levels, after pushing to 148.41, a Tokyo session lows and the lowest level since May 9.

• 40-year supply appeared to weigh on the market despite being successfully absorbed by the market. While the high yield came in below dealer expectations, the cover ratio, which indicates demand, declined to 2.377x compared to 2.694x at the late-March auction. It appears the overall flattening and richening of the yield curve reduced demand relative to the late March auction, as flagged in our auction preview.
• Cash JGBs weaken in afternoon Tokyo trade with yields higher across the curve. Yield movements range from 0.2bp higher (40-year) to 1.4bp higher (7-year). The benchmark 10-year yield is 1.1bp higher at 0.425%, below the BoJ's YCC limit of 0.50%. The 40-year yield moved 1.5bp higher in post-auction trade.
• The swaps curve bear steepens with swap spreads wider beyond the 1-year zone.
• The local calendar sees Tokyo CPI scheduled along with the weekly 3-month bill auction.
• Later today sees the release of Q1 US GDP (2nd estimate). Nonetheless, the market attention is likely to remain on US debt ceiling negotiations.

AUSSIE BONDS: Cheaper, Fitch US Ratings Warning Weighs

ACGBs are cheaper (YM -8.0 & XM -4.0) sitting just off Sydney session cheaps. With local economic data and headlines light, local participants have been on US tsy watch.

• To recap, early in the session Fitch placed the US on negative ratings watch as the deadline for an increase in the debt ceiling approaches. US tsys are 1-3bp cheaper in Asia-Pac trade with the curve flatter.
• Cash ACGBs are 4-7bp cheaper with 3/10bp curve flatter and the AU-US 10-year yield differential -2bp at -7bp.
• Swap rates are 2-4bp higher with EFPs 2bp tighter.
• The bills strip bear flattened with pricing -3 to -7.
• RBA dated OIS are 1-6bp firmer with late ‘23/early ’24 leading.
• The local calendar heats up tomorrow after a light few days with the release of April Sales. While the official ABS retail estimates account for regular seasonal fluctuations, they can encounter challenges during the Easter period. This is primarily due to the variable timing of the holiday and its proximity to other holidays, which can disrupt the accuracy of the adjustments.
• Later today sees the release of Q1 US GDP (2nd estimate). Nonetheless, the market attention is likely to remain on US debt ceiling negotiations.

NZGBS: Weaker But Outperforms The $-Bloc

NZGBs closed 3-4bp cheaper within a relatively narrow range. The local market grappled with conflicting factors, including the dovish hike by the RBNZ and the upward pressure on global yields due to the ongoing uncertainty surrounding the debt ceiling. Accordingly, NZGBs have maintained yesterday’s outperformance in the $-Bloc with NZ/US and NZ/AU 10-year yield differentials 3bp and 2bp respectively lower.

• The strong relative performance of NZGBs was supported by solid auction results for the May-28 and Apr-33 bonds, which exhibited higher cover ratios compared to their previous auctions. However, it is worth noting that the cover ratio for the May-51 bond was relatively low at 2.46x, in contrast to the prior auction result of 4.42x.
• Swap rates closed 3-4bp higher with the 2s10s curve unchanged and implied short-end swap spreads wider.
• RBNZ dated OIS closed with pricing 5-7bp firmer for meetings beyond August. Terminal rate expectations sit at 5.63%. A 30% chance is attached to a 25bp hike in July.
• The local calendar remains light tomorrow with ANZ Consumer Confidence as the highlight.
• Later today sees the release of Q1 US GDP (2nd estimate).

RBNZ: MNI RBNZ Review - May 2023:  RBNZ Moves To Neutral

• The RBNZ hiked rates 25bp to 5.5%, as generally projected. The forecasted peak in the OCR remains at 5.5%, thus the central bank appears to have reached its terminal rate and so has shifted to a neutral stance from its tightening bias.
• The discussion also shifted down a step to whether to hike 25bp or pause. In the vote that followed 5 chose the hike and 2 a pause. The statement focused on the slowing impact of restrictive policy and the transmission lags rather than upside risks to inflation. It now looks highly likely that the RBNZ will be on hold at its July 12 meeting.
• The meeting summary noted that policy will need to “remain at a restrictive level for the foreseeable future” in order to meet the inflation target. While the RBNZ' stance has moved to neutral, any near-term easing expectations have been quashed.
• See full review here.

EQUITIES: Tech/AI Stocks One Of The Few Bright Spots, Negative Trends Elsewhere

Regional equity markets are mostly tracking lower, led by HK shares and China related bourses. Some positive offset has come from a sharp rise in US Nasdaq futures, ignited by a surge in chipmaker Nvidia after hours on a positive sales outlook. Nasdaq futures are +1.40%, slightly down from session highs, Eminis are +0.40%.

• We saw some wobbles in early trade, as Fitch stated it was placing the US on negative ratings watch, as debt ceiling negotiations continue. However, this hasn't had a lasting impact on sentiment.
• Clear negatives have been evident in terms of the HSI, which is off by over 2% at this stage. The HS Chine Enterprise Index is slightly worse, -2.30%. Xpeng weakness has weighed, with the company's earnings guidance reportedly disappointing the market.
• Mainland China shares also continue to track lower, unable to sustain any upside momentum, the CSI 300 sitting -0.50% weaker at this stage. Northbound stock connect outflows are -5.73bn yuan so far.
• Positive tech/chip sentiment is evident for the Taiex, up around 0.80% at this stage. The Nikkei 225 is around 0.50% firmer, but the Topix is down slightly. Chip stocks in South Korea are also higher, but not enough to drive the aggregate market higher, the Kospi last -0.50%.
• Markets are mostly weaker in SEA, although Thai shares are close to flat, while Indian stocks have opened up in modestly positive territory.

FOREX: Greenback Firmer In Asia, Fitch Places US On Negative Rating Watch

The greenback is firmer in Asia today, BBDXY is up ~0.2%. Fitch has put the US on negative ratings watch as the deadline for an increase in the debt ceiling approaches. US Tsy released a statement noting that the Fitch report shows the swift need for bipartisan action. They also said that brinkmanship over the debt limit does serious harm to business, raises short term borrowing costs and threatens the credit rating of the US.

• Kiwi is pressured and is the weakest performer in the G-10 space at the margins, NZD/USD has extended yesterday's post-RBNZ losses and is down a further 0.4% today. We currently sit a touch above year to date lows.
• AUD/USD is down ~0.2%, the low from May 24 ($0.6532) has been broken. The next downside support is at $0.6403 76.4% retracement of the Oct-Feb bull cycle.
• Yen is marginally pressured, USD/JPY is ~0.1% firmer. Wednesday's highs have been breached and we sit at the highest level since late November.
• Elsewhere in G-10, EUR and GBP are both ~0.2% lower.
• Cross asset wise; US Equity Futures are higher, e-minis up ~0.4% NASDAQ up 1.4% after Nvidia, the world's most valuable chipmaker, rose 26% after demand for AI buoyed its sales forecast. 2 Year US Treasury Yields are ~3bps higher.
• In Europe today we have the final read of German GDP, further out a slew of US data crosses including Q1 GDP, Initial Jobless Claims and Pending Home Sales.

OIL: Crude Currently Supported By Saudi Comments & US Stock Drawdown

Oil prices have been zig-zagging sideways in a narrow range during APAC trading today after rising around 2% on Wednesday. WTI is down 0.2% to $74.20/bbl, while Brent is fairly steady around $78.32. Crude has been supported by a sharp drawdown in US stocks despite the lack of a debt-ceiling deal and Fitch announcing today that the US was on negative credit watch as a result. The USD index is up 0.2%.

• The Fed is currently expected to be on hold at its June 14 meeting but a number of Fed officials are still sounding hawkish and warning that inflation has not yet been contained.
• OPEC+ meets over the June 3-4 weekend and while the Saudi energy minister warned that speculators should “watch out’, many analysts still think that the group will leave their output quota unchanged. But there is a risk of another cut.
• Fed’s Barkin and Collins speak later. There are also revised US and German Q1 GDP data, and US jobless claims and Chicago/Kansas Fed indices.

GOLD: Holding At Six-Week Lows

Gold remains relatively unchanged in the Asia-Pacific session, holding steady after experiencing a 0.9% decline on Wednesday, with prices closing at 1957.16, slightly above the six-week low.

• After tumbling last week to the lowest since early April, bullion has been trading in a tight range as investors wait for more clarity on the debt-ceiling standoff and the Federal Reserve’s rate path.
• There was no progress in resolving the US debt impasse on Wednesday.
• Bullion is facing headwinds from growing bets on another Federal Reserve rate hike this year. The release of the minutes from the May FOMC meeting revealed a division among officials regarding their support for further interest rate hikes, emphasising the importance of maintaining flexibility. A tighter monetary policy tends to undermine the non-yielding asset.

ASIA FX: USD/Asia Pairs Higher Across The Board, BI Still To Come

USD/Asia pairs are higher across the board. USD/CNH has hit fresh highs amid on-going equity weakness and strong Northbound stock connect outflows. The Korean won didn't see any benefit from a more hawkish BoK. MYR has hit 6 month lows, while USD/IDR is tracking higher ahead of the BI decision later, no change is expected. Tomorrow, Malaysia CPI is out, along with Taiwan's final Q1 GDP read. Singapore IP also prints.

• USD/CNH continues to track higher, we currently sit just below session highs, in the 7.0820/30 region. Onshore USD/CNY spot is through 7.0700. Both pairs are back to highs from early Dec last year. Equity headwinds persist, with China related equities down further today. The CSI300 is off by 0.50% at this stage, threatening fresh YTD lows. Northbound stock connect outflows continue, with a further 5.7bn yuan in outflows so far today. If maintained this would bring net outflows for the past 3 sessions to just over 18bn yuan. This would be the worst 3-day run of outflows since late October last year.
• 1 month USD/KRW is higher, weighed by the weaker CNH trend, and lower onshore equities. The BoK held rates steady but delivered a hawkish update, boosting its core inflation forecast to 3.3% for 2023 (from 3%). This didn't aid the won though, with the Kospi off by 0.40% at this stage. 1 month USD/KRW is back close to 1325, around 0.55% weaker in won terms versus NY closing levels from Thursday.
• TWD has fared better. Spot relatively steady in USD/TWD terms at 30.80. The Taiex has rallied 0.80% on chip maker optimism following Nvidia's positive earnings update.
• USD/MYR prints at 4.6200/6250, the pair is ~0.6% firmer today as broader USD/Asia trends dominate. Ringgit is at its lowest level since 11 November, the MYR has weakened ~3.5% in May. Palm Oil Futures have fallen ~12% from their high in early May, losses have been marginally pared and we sit at 3540/50. Looking ahead on the wire tomorrow we have April CPI, the print is expected at 3.3% Y/Y slowing from 3.4% in March.
• The SGD NEER (per Goldman Sachs estimates) is little changed this morning, we remain within recent ranges. We now sit ~0.8% below the upper end of the band. USD/SGD is a touch above the 200-Day EMA ($1.3512) and prints at its highest level since mid March. Broader US trends have seen the pair firm in recent dealing. The final read of Q1 GDP printed a touch firmer than expected. Y/Y growth printed at 0.4% vs 0.2% expected, Q/Q fell 0.4%. The downtrend in GDP growth is still intact though, y/y growth momentum still back to late 2020 lows. On the wires tomorrow we have April Industrial Production, a M/M rise of 0.1% is expected.
• In line with broader USD trends, USD/IDR is pushing higher in the first part of trade today. We last tracked in the 14950/55 region, -0.30% weaker in IDR terms for the session so far. We are right around May 19 highs and early April highs. Note also the simple 50-day MA is not too far away on the topside, close to 15000. Lows from earlier in the week came in close to 14850. The main focus today is the BI decision, with the central bank seen firmly on hold. The outlook, particularly in terms of potential rate cuts, along with financial stability issues (IDR rate etc) are likely to be the main focus points.

SOUTH KOREA: Highlights From Local News Wires

Below is a collection of news wires reports from English versions of South Korean Newspapers and some other major news outlets from the past day or so.

ECONOMY: Korea to maintain policy goal to tame inflation, diversify exports: Choo (link)

ECONOMY: Biz outlook edges up for June on hope for corporate earnings, domestic recovery (link)

MARKETS: Korean chipmaker shares rally as Nvidia expects revenue boom (link)

MARKETS: Financial authorities to extend buying program of asset-backed commercial paper (link)

MARKETS: Will foreign investors extend record buying spree of Samsung shares? (link)

TECH: S. Korea asks US to give more leeway on chip expansion in China (link)

TECH: DRAM demand forecast to outrun supply in H2: report (link)

TECH: Korean screen makers face 20% price hike from U.S. supplier (link)

SHIPPING: Shipbuilders struggle with foreign workers deserting jobs (link)

GEOPOLITICS: Korea says size of aid commitment overstated by Ukraine (link)