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MNI US OPEN - Optimistic, But No Debt Deal Yet

EXECUTIVE SUMMARY:

Figure 1: Eurozone Manufacturing, Services Flash PMIs Diverge

NEWS

US (BBG): Biden-McCarthy Debt Talk Ends With Optimism, But Without a Deal

President Joe Biden and House Speaker Kevin McCarthy remained without a deal on the debt limit Monday night after another round of talks, though they called their discussions productive and vowed to keep negotiating to avert a catastrophic US default. The two met at the White House for more than an hour Monday evening in Washington. Earlier, Treasury Secretary Janet Yellen warned it’s “highly likely” her department would run out of sufficient cash in early June and that default could come as soon as June 1.

US (BBG): US Embarks on Major Trade Mission to Indonesia to Counter China

Indonesia will host one of its largest American trade delegations yet as the US seeks to counterbalance China’s fast-growing presence in Southeast Asia’s largest economy. Around 100 senior executives from more than 30 US companies will visit Jakarta this week to discuss investment opportunities in Indonesia and the broader region, the biggest that the US-ASEAN Business Council has ever organized.

UK (BBG): IMF Upgrades UK Growth But Warns Rates May Need to Rise Further

The UK economy will grow faster than Germany this year and avoid a recession, the International Monetary Fund said, after sharply upgrading its forecast on the back of strong household spending and better relations with the European Union. Falling energy prices will also help Britain expand 0.4% this year, the IMF said on Tuesday in its regular health check on the UK economy. That’s up from the 0.3% contraction the fund projected just last month, and which will lift the UK off the bottom of the G-7 league table.

CHINA (MNI): Weaker Yuan to Stay With Rate Cuts in Coming Months

China’s reference lending rate will likely remain unchanged in coming months as banks cope with already-slim interest-rate margins and yuan weakness limits room for a policy rate cut, though a weak economy might still prompt easing later in the year, economists and analysts told MNI. The loan prime rate (LPR), based on the People’s Bank of China’s Medium-term Lending Facility (MLF) rate and quotes submitted by 18 banks, remained steady for a ninth consecutive month at 3.65% for the one-year maturity and 4.3% for the over five-year maturity on Monday.

CHINA (BBG): China Buying of Chipmaking Gear From Singapore Hits 8-Month High

Singapore is benefiting from the US-China discord in at least one respect: semiconductor sales. China imported $407 million worth of chipmaking machinery from Singapore in April, according to the latest Chinese customs data. It was the highest amount since August, rising 9.6% from March and going against the wider trend of diminishing semiconductor exports to China. The country overall imported 27% less in chipmaking gear during April than the prior year.

CHINA (MNI): China Pork Prices To Stage Muted Rebound In H2

Chinese pork prices, a key component of CPI, should recover moderately in Q4 as weak demand and fierce competition prompt smaller producers to leave the market and the government signals it wants higher prices, local analysts told MNI. Average pork prices fell 41% to CNY15.6/kg in April from the September-October 2022 high of CNY26.6/kg.

MNI RBNZ PREVIEW - MAY 2023: Tightening Still Needed, Pace Can Slow

Increased fiscal stimulus, soaring immigration and inflationary impact of rebuilding make the outcome of the May 24 RBNZ meeting a close call between a 25bp and 50bp hike. We think that the RBNZ can afford to step down to +25bp as inflation and inflation expectations are moving in the right direction and policy is now restrictive. But with inflation elevated and demand robust, the RBNZ is still likely to tighten further and keep its tightening bias.

RUSSIA/INDIA (BBG): Russia Pushes India for Help to Avert Global Financial Isolation

The Kremlin is pressuring governments including India behind the scenes, threatening to upend defense and energy deals unless they help block expected moves aimed at turning Russia into a financial pariah state over its invasion of Ukraine. Documents seen by Bloomberg and accounts by officials in NATO countries familiar with the situation offer a rare insight into how Russia is targeting commercial partners ahead of a June meeting of the global watchdog against money-laundering.

OIL (BBG): Saudi Energy Minister Tells Oil Speculators to ‘Watch Out’

Saudi Arabia’s top energy official issued another warning to oil short-sellers, just over a week before the OPEC+ alliance is due to meet. Riyadh and its partners surprised crude traders last month by announcing output cutbacks intended to scare off speculators. Money managers have turned bearish again in recent weeks amid fears of a weaker global economy. “I keep advising them that they will be ouching — they did ouch in April,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the Qatar Economic Forum in Doha on Tuesday. “I would just tell them: Watch out!”

GREECE (MNI): Tsipras - No Conditions to Form Coalition Government

Head of the main opposition leftist SYRIZA, former PM Alexis Tsipras, has stated that there are 'no conditions to form a coalition gov't'. This comes after Tsipras was given the mandate to seek to form a coalition government by President Katerina Sakellaropoulou following PM Kyriakos Mitsotakis' refusal to hold coalition talks yesterday. With the head of the third-largest party in parliament also indicating that he will not seek to form a coalition, the eventual outcome is set to be a snap election in late June.

DATA

EUROZONE DATA (MNI): May PMI Data Flags Services Driving Inflation & Q2 Expansion

  • EUROZONE MAY FLASH MANUF PMI 44.6 (FCST 46.0); APR 45.8
  • EUROZONE MAY FLASH SERVICES PMI 55.9 (FCST 55.5); APR 56.2

Foreshadowed by French and German PMIs this morning, the eurozone aggregate May PMIs pointed to continued strength in services, whilst manufacturing dipped deeper into contractive territory. The outperformance of services vs manufacturing was the largest divergence since 2009. The eurozone manufacturing PMI fell 1.2 points to 44.6 (3-year low), against expectations of a marginal uptick. Meanwhile services cooled by 0.8 points to 53.3, 0.2pp lower than anticipated.

GERMAN DATA (MNI): Stark Manufacturing & Services PMI Divergence

  • GERMANY MAY FLASH MANUF PMI 42.9 (FCST 45.0); APR 44.5
  • GERMANY MAY FLASH SERVICES PMI 57.8 (FCST 55.0); APR 56.0

The May flash PMI data showed a stronger divergence between contractionary manufacturing activity and robust service-sector expansion. The German flash manufacturing PMI recorded a deepened downturn in May, declining by 1.6 points to 42.9 (a 3-year low) against expectations of a 0.5-point uptick. Meanwhile services strengthened by 1.8 points to 57.8 (21-month high), against expectations of a 1pp decline. Business confidence cooled to a five-month low, with reliance on work backlogs cited as supporting current production levels.

FRANCE DATA (MNI): Service Price Inflation Ticks Up in France Flash PMI

  • FRANCE MAY FLASH MANUF PMI 46.1 (FCST 46.0); APR 45.6
  • FRANCE MAY FLASH SERVICES PMI 52.8 (FCST 54.0); APR 54.6

The French May manufacturing PMI edged up by 0.5-points to 46.1, in line with expectations and implying 12 months of contraction. Services lost some growth momentum in May, easing by 1.8 points to 52.8, softer than consensus expectations.

UK DATA (MNI): Higher Benefits & Debt Interest Payable Boosts April Net Borrowing

  • UK APR PSNB-X GBP+25.56 BN
  • UK APR PSNB GBP +24.74 BN
  • UK APR PSNCR GBP13.67 BN
  • UK APR CGNCR GBP18.73 BN

At 25.6bln in April, UK public sector net borrowing (PSNB ex) was 3.1bln above OBR forecasts and 6.5bln higher than consensus expectations. This April, PSNB ex was 11.9bln higher than April 2022. Energy support schemes, benefit payments and higher interest payments on debt accounted largely for the uptick. The increased interest payable on gilts in April was the third-highest on record. This was the second highest April borrowing on record and reflects April increases in benefit payments (increased to buffer against declining real value on the back of high inflation).

UK MAY FLASH MANUF PMI 46.9 (FCST 48.0); APR 47.8 (MNI)
UK MAY FLASH SERVICES PMI 55.1 (FCST 55.3); APR 55.9 (MNI)

JAPAN DATA (MNI): Japan's Trimmed Mean Rises To 3.0% Vs. Mar 2.9%

Japan's trimmed mean measure of underlying inflation increased to 3.0% y/y in April from March's 2.9%, indicating continued pass-through of cost increases, despite a fall in import prices from a year earlier, Bank of Japan data showed Tuesday. The accelerated trimmed mean followed Friday's release of the annual core consumer inflation rate, which rose 3.4% y/y in April from March's 3.1% – the 13th straight month above the 2% target.

AUSTRALIA DATA (MNI): Activity Expanding, Services Pricing Power Remains Strong

The Judo Bank preliminary PMIs eased in May but still show growth but at a slower pace and driven by services. They suggest that the trough in quarterly growth may have been Q4 2022. The composite moderated to 51.2 from 53, services to 51.8 from 53.7 and manufacturing steady at 48, the 6th consecutive contraction. The increase in services employment and higher output inflation are concerning elements of the report.

FOREX: EUR/GBP Tilted Higher on Diverging PMIs

  • Markets trade with a modest risk-off feel, putting the JPY at the top of the pile alongside the greenback. Equities sit slightly lower ahead of the NY crossover, despite reports of modest progress in negotiations between McCarthy and Biden in sealing a deal on the debt ceiling this week. Markets clearly remain cautious of a breakdown in the talks, with short-end T-bill yields continuing to march higher as we near the so-called X date and the US government can no longer finance day-to-day operations.
  • PMI data across Europe painted a mixed picture, with Eurozone services outperforming, while manufacturing lagged. In contrast, UK data was poorer-than-expected, tipping the composite to 53.9 vs. Exp. 54.6. EUR/GBP trades higher on the session, having traded 0.8719 at the high.
  • NOK trades at the bottom-end of the G10 table, prompting EUR/NOK to again narrow the gap with the early May highs at 11.9491. A break above here puts the cross at the best levels since the COVID pandemic in Q1 2020. NOK sits weaker following another poor consumer confidence read as well as the Norges Bank's inflation expectations survey, which showed a marked step-down in price pressure forecasts - with households now seeing 12m inflation at 4% - a 2ppts drop from the prior reading.
  • Prelim PMI data from the US, new home sales and the Richmond Fed manufacturing index take focus going forward, with speeches scheduled from BoE's Bailey & Haskel, Fed's Logan and ECB's Villeroy & Nagel.

BONDS: Gilts Lead Way Lower As European Service Price Pressures Linger

Weaker-than-expected European preliminary PMIs have not had a lasting bullish impact on core FI, with Bunds and Gilts weakening in early Tuesday trade.

  • UK / German yields are up around 5bp / 1bp respectively in parallel across the curve, while the US curve is twist flattening fairly sharply, with 2Y yields up 4bp and 10-30Y +/-0.5bp.
  • The impact of poor manufacturing PMIs appears more than offset by continued strength in activity and prices in Services PMI across this morning's Eurozone and UK readings.
  • Gilts have led the way lower, with BoE terminal rate pricing picking up where it left off Monday up 4bp to the highest (5.05% by Nov) since October 2022 - ahead of Wednesday's CPI reading.
  • Periphery EGBs have calmed vs Monday's GGB rally, with spreads steady.
  • Aside from PMIs and any further debt limit developments, US focus will be on data including New Home Sales and regional Fed activity readings (Philly Fed non-manuf, and Richmond Manuf).
  • Later in the session we hear from BoE's Haskel (Bailey is underway as we write), ECB's Villeroy and Nagel, and Dallas Fed's Logan.

Latest levels:

  • Jun US 10Y futures (TY) down 2.5/32 at 113-12.5 (L: 113-10.5 / H: 113-17)
  • Jun Bund futures (RX) down 21 ticks at 133.77 (L: 133.72 / H: 134.15)
  • Jun Gilt futures (G) down 54 ticks at 97.54 (L: 97.44 / H: 97.98)
  • Italy / German 10-Yr spread 0.2bps wider at 185.7bps

EQUITIES: E-Mini S&Ps Remain Close to Recent Highs Despite Slight Downtick Tuesday

Eurostoxx 50 futures outlook remains bullish and the contract is trading at its recent highs. Price has recently cleared resistance at 4363.00, the Apr 21 high and a bull trigger. The break confirms a resumption of the bull cycle from Mar 20 and a continuation of the medium-term uptrend. This opens 4409.50, the Nov 18 2021 high on the continuation chart and a key resistance. Firm support is at 4263.00, the 50-day EMA. The S&P E-minis trend needle continues to point north. The contract traded higher last week and breached key short-term resistance and the bull trigger at 4206.25, the May 1 high. Clearance of this level confirms an extension of the bull trend from Mar 13. This opens 4244.00, the Feb 2 high and the next important resistance. Key support is at 4062.25, the May 4 low. A move through this level would highlight a bearish threat.

  • Japan's NIKKEI closed lower by 129.05 pts or -0.42% at 30957.77 and the TOPIX ended 14.41 pts lower or -0.66% at 2161.49.
  • Elsewhere, in China the SHANGHAI closed lower by 50.231 pts or -1.52% at 3246.238 and the HANG SENG ended 246.92 pts lower or -1.25% at 19431.25.
  • Across Europe, Germany's DAX trades lower by 17.84 pts or -0.11% at 16205.32, FTSE 100 higher by 4.33 pts or +0.06% at 7776.75, CAC 40 down 58.53 pts or -0.78% at 7417.32 and Euro Stoxx 50 down 18.38 pts or -0.42% at 4365.79.
  • Dow Jones mini down 46 pts or -0.14% at 33315, S&P 500 mini down 3.25 pts or -0.08% at 4202.25, NASDAQ mini up 0.25 pts or +0% at 13905.5.

COMMODITIES: Gold Remains in Bearish Cycle and Close to Recent Lows

A short-term bearish threat in WTI futures remains present and initial resistance at $73.81, the May 10 high, is intact. A resumption of weakness and a break of $69.39, the May 15 low, would strengthen near-term bearish conditions. The recent print below $64.67, the Mar 20 low and a key support, is a key bearish development. A clear break of it would resume the broader downtrend. Gold remains in a bearish cycle and is trading closer to its recent lows. The yellow metal last week cleared support at $1976.1, the 50-day EMA and $1969.3, the Apr 19 low. The clear break of this support zone highlights a stronger bearish threat and opens $1934.3, the Mar 22 low and $1926.9, trendline support drawn from Nov 3 2022. Key resistance and the bull trigger is at $2063.0, May 4 high. Initial firm resistance is $2022.6, the May 12 high.

  • WTI Crude down $0.13 or -0.18% at $71.87
  • Natural Gas down $0 or -0.13% at $2.395
  • Gold spot down $12.53 or -0.64% at $1959.26
  • Copper down $5.25 or -1.42% at $363.3
  • Silver down $0.38 or -1.63% at $23.2422
  • Platinum down $9.41 or -0.88% at $1061.12

DateGMT/LocalImpactFlagCountryEvent
23/05/20230900/1000*UKIndex Linked Gilt Outright Auction Result
23/05/20230915/1015UKBOE Bailey, Pill, Tenreyro, Mann at MPR Hearing
23/05/20231230/0830*CAIndustrial Product and Raw Material Price Index
23/05/20231230/0830**USPhiladelphia Fed Nonmanufacturing Index
23/05/20231255/0855**USRedbook Retail Sales Index
23/05/20231300/0900USDallas Fed's Lorie Logan
23/05/20231345/0945***USIHS Markit Manufacturing Index (flash)
23/05/20231345/0945***USS&P Global Services Index (flash)
23/05/20231400/1000***USNew Home Sales
23/05/20231400/1000**USRichmond Fed Survey
23/05/20231445/1545UKBOE Haskel Panellist at Richmond Fed Conference
23/05/20231530/1130*USUS Treasury Auction Result for Cash Management Bill
23/05/20231700/1300*USUS Treasury Auction Result for 2 Year Note
24/05/20230200/1400***NZRBNZ official cash rate decision
24/05/20230600/0700***UKConsumer inflation report
24/05/20230600/0700***UKProducer Prices
24/05/20230800/1000***DEIFO Business Climate Index
24/05/20230830/0930*UKONS House Price Index
24/05/20230930/1030UKBOE Bailey Keynote Speech at Mansion House Net Zero Summit
24/05/20231000/1100**UKCBI Industrial Trends
24/05/20231100/0700**USMBA Weekly Applications Index
24/05/20231230/0830*CAQuarterly financial statistics for enterprises
24/05/20231300/1500**BEBNB Business Sentiment
24/05/20231300/1400UKBOE Bailey Frieside Chat at WSJ CEO Council Summit
24/05/20231405/1005USTreasury Secretary Janet Yellen
24/05/20231430/1030**USDOE Weekly Crude Oil Stocks
24/05/20231530/1130**USUS Treasury Auction Result for 2 Year Floating Rate Note
24/05/20231610/1210USFed Governor Christopher Waller
24/05/20231700/1300*USUS Treasury Auction Result for 5 Year Note
24/05/20231745/1945EUECB Lagarde Opens Anniversary of ECB Event
24/05/20231800/1400*USFOMC Statement

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