MNI US OPEN - State Readings Imply German National CPI at 2.3-2.4% Y/Y

NEWS

US/ISRAEL (BBG): White House Says Israel’s Rafah Strike Doesn’t Cross Red Line

The White House said an Israeli strike on an encampment in Rafah that left dozens dead was devastating but would not cause President Joe Biden to freeze additional arms shipments to the country. “As a result of this strike on Sunday, I have no policy changes to speak to,” White House National Security Council spokesman John Kirby told reporters. The US would be monitoring the investigation into the incident and expected Israel to learn lessons from the airstrike, Kirby said. But Kirby said the bombing – which Israeli Prime Minister Benjamin Netanyahu described as a “tragic mistake” – was short of the large-scale military operation that the US has warned Israel would carry consequences.

US/CHINA (MNI): Chinese Vice FM to Visit US as Defence Mins Set to Meet in Singapore

MNI (London) The Chinese Foreign Ministry has confirmed that Vice-Minister of Foreign Affairs Ma Zhaoxu will visit the US from 30 May - 2 June to hold talks with US Deputy Secretary of State Kurt Campbell. From 2021 to February 2024 Campbell had served as the White House's Indo-Pacific in order to, as the FT reported, "...sharpen the US focus on China as the "pacing threat" - its priority strategic consideration." In February the US Senate confirmed Campbell as Deputy SoS, leaving the Indo-Pacific role vacant.

ECB (MNI): Last Mile Likely Bumpy After June Cut - ECB's Kazaks

The European Central Bank is heading to cut rates by 25 basis points at its meeting in June, reversing the “insurance hike” of September 2023, but while the eurozone may achieve a soft landing it is too early to declare victory over inflation and there is no assured subsequent rate path, ECB Governing Council member and Bank of Latvia Governor Martins Kazaks told an MNI Connect event in his opening presentation.

ECB (BBG): ECB’s Vujcic Faces Uncertain Future With New Term in the Balance

Croatia’s new government is throwing the future of the country’s central bank chief into question at a critical juncture for euro-zone interest rates. The administration, which took power this month, has until July 13 to decide whether to hand the 59-year-old Boris Vujcic a third six-year stint as governor. But with the addition of a nationalist party to Prime Minister Andrej Plenkovic’s ruling coalition complicating appointments, Vujcic’s prospects are unclear.

EU (BBG): EU Must Rethink Bank Capital Rules If US Diverges, Villeroy Says

The European Union should delay or even weaken new bank capital rules if the US is seen as doing the same, France’s top central banker said Wednesday. In a scenario where US authorities were to diverge from the agreed rules or decide to apply them at a later date, Europe should “postpone the entry into force, or even adjust certain provisions, especially those on market risks,” Bank of France Governor Francois Villeroy de Galhau said at an event in Paris. “It’s clearly not our first best, but it’s a safeguard.”

CHINA (MNI): IMF China 2024 GDP Growth Revised Up

MNI (Beijing) The International Monetary Fund has increased its China GDP forecast to 5% this year and 4.5% in 2025, up 0.4 pp for both years, an IMF report said Wednesday. Strong Q1 GDP data and recent policy measures drove the revision, while core inflation will average 1% in 2024, the report said. Authorities' recent property support measures were welcome, but a more comprehensive package would ensure less costly transition while mitigating downside risks, the report noted. However downside risks remained, such as fragmentation pressures.

CHINA (BBG): Xi Hosts Arab Leaders as China’s ‘Soft Power’ Expands in Mideast

President Xi Jinping will meet Arab leaders this week seeking deeper ties in a region where China does plenty of business — and increasingly diplomacy, too. Xi will address the China-Arab States Cooperation Forum in Beijing on Thursday with heads of state from Egypt, the United Arab Emirates, Bahrain and Tunisia among the attendees. Talks will likely focus on fast-growing trade and investment, and regional security concerns amid the Israel-Hamas war.

BOJ (MNI): Faster Policy Adjustments Possible - BOJ's Adachi

Bank of Japan board member Seiji Adachi said on Wednesday that the Bank could need to adjust the degree of easy policy through rate hikes faster than previously thought. “If the weak yen accelerated or if it is prolonged, there is the possibility that the year-on-year change of consumer price index would reverse earlier than expected," Adachi told business leaders in Kumamoto City. "If this happened, the BOJ may need to quicken the pace of adjusting the degree of easy policy.”

BOJ (MNI): BOJ Posts Unrealised JGB Losses of JPY9.43 Trln

The Bank of Japan announced on Wednesday unrealised losses of JPY9.43 trillion its Japanese government bond holdings at the end of March, due to the rise in interest rates, sharply up from the losses of JPY157.1 billion last fiscal year and a second straight annual. The rise in unrealised losses will not affect the bank's earnings, as the accounting treatment for JGBs assumes they will be held to maturity. The BOJ posted record high net income of JPY2.29 trillion in fiscal year 2023, up from JPY2.09 trillion a year earlier.

SOUTH AFRICA (MNI): South African Voters Head to Polling Stations in Highly Consequential Election

Polling stations in South Africa will stay open until 20:00BST/21:00SAST but the results may not be announced until the weekend. Support for the ruling African National Congress (ANC) edged higher into the election day, with the closely watched daily tracker ran by the Social Research Foundation (SRF) estimating it at 42.2% on May 27, assuming a turnout rate of 66% (as was the case in the 2019 election). If the support for the ANC falls below 50%, the party will need to find a coalition partner for the first time in South Africa's post-Apartheid history.

INDIA (BBG): S&P Raises India’s Rating Outlook to Positive on Strong Growth

S&P Global Ratings raised its outlook on India’s sovereign credit rating to positive, citing the economy’s growth momentum over the next two to three years. The outlook on the BBB- rating, the lowest investment grade level, was raised from stable, S&P said in a statement Wednesday. “Regardless of the election outcome, we expect broad continuity in economic reforms and fiscal policies,” S&P said.

MEXICO (BBG): Sheinbaum's Lead Steadies in Final Days of Campaign

Just a day before Mexico's campaign period ends, ruling party candidate Claudia Sheinbaum looks well positioned for a successful outcome in Sunday's election. She has a 25-point lead over the main opposition contender, Xóchitl Gálvez, whose voter intention remains flat. Third-place candidate Jorge Álvarez Máynez has held intention near 11%.The latter made headlines over the past week when the collapse of a stage during a party campaign event led to nine casualties.

DATA

GERMAN DATA (MNI): MNI Projects 2.3-2.4% National CPI Y/Y, Core CPI Flat Around 3.0%

From state-level data that equates to 86.7% weighting of the national May flash German CPI print (due at 13:00 BST/14:00 CET), MNI estimates that national CPI (non-HICP print) rose by 0.0-0.1% M/M (April: 0.5%) and 2.3-2.4% Y/Y (April: 2.2%). Analyst consensus currently stands at 0.2% M/M and 2.4% Y/Y so this would represent a lower reading than had been expected on the monthly comparison (but broadly in line Y/Y). Current tracking of core CPI (ex-energy and food, based on 50% of the national index) implies 3.0% Y/Y (3.0% in April) and 0.2-0.3% M/M, per our calculations.

SPAIN DATA (MNI): Retail Sales Bounce in April, But Trend Remains Subdued

Spanish real retail sales rose 0.8% M/M (vs -0.4% prior) and 0.3% Y/Y (vs an upwardly revised 0.9% prior). There was no consensus for the print, and both metrics are in SWDA terms. While retail sales have begun the quarter on a strong note, the recent trend remains subdued, with sales falling 0.1% on a 3m/3m basis in April (vs -0.4% prior). The EC's retail sentiment index has similarly hovered just above neutral levels, suggesting a strong recovery is unlikely in the next few months. The May EC survey data is released tomorrow. All major sub-components saw rising sales on a monthly basis, with food products seeing the largest increase of 1.2%.

FRANCE DATA (MNI): France Consumer Sentiment Stable

• FRANCE MAY CONSUMER SENTIMENT 90

France Consumer Sentiment printed a touch lower than expected at +90 (vs +91 consensus, +90 prior), but remains in the range of 88-91 since November 2023. From the sub-components of particular interest is that 'Financial Situation, next 12 months' fell for the second consecutive month by 2 points to -14 - the lowest since October 2023 and taking it further below it's long term average of -7. Meanwhile, the proportion of households expecting to make major purchases in next 12 months rose for the third consecutive month by 1 point to -32, although it remains below it's long term average of -15.

ITALY ISTAT MAY CONSUMER CONF INDEX 96.4 (FCST: 96.0); APR 95.2 (MNI)
ITALY ISTAT MAY BUSINESS CONF INDEX 88.4 (FCST: 88.0); APR 87.7 (MNI)

SWEDEN APR RETAIL SALES +0.5% Y/Y (MNI)

AUSTRALIA DATA (MNI): Aussie April Monthly CPI at 3.6%

• AUSTRALIA MONTHLY APR CPI 0.2% MM, 3.8% YY

The Australian monthly consumer price index indicator was 3.6% y/y in April, 20 basis points higher than expected and 10bp more than the prior month, according to the latest data from the Australian Bureau of Statistics (ABS). “Inflation has been relatively stable over the past five months, although this is the second month in a row where annual inflation has had a small increase,” said Michelle Marquardt, head of prices statistics at the ABS. The most significant contributors to the April annual rise were housing (4.9%), food and non-alcoholic beverages (3.8%), alcohol and tobacco (6.5%), and transport (4.2%).

MNI CHINA LIQUIDITY INDEX: May Liquidity Eases

• MAY CHINA LIQUIDITY CONDITION INDEX 23.8 VS APR 26.2
• MAY CURRENT ECON CONDITION INDEX 65.5 VS APR 57.1

MNI (Beijing) China’s interbank market liquidity eased in May amid expectations authorities will take measures to deal with idle funds in the financial system and support expansionary fiscal policy, the latest MNI China Liquidity Survey has shown. The MNI China Liquidity Condition Index stood at 23.8 in May, the lowest in 24 months, down from last month’s 26.2. A lower reading indicates more liquidity. Interest rates on one-year AAA negotiable certificates of deposit (NCDs), a measure of short-term interbank lending costs, reached 2.1021% on May 27, below the PBOC’s MLF rate of 3.45%.

JAPAN DATA (MNI): Japan May Confidence Marks 2nd Straight Drop

Japan's consumer confidence index fell to 36.2 in May from 38.3 in April, its second straight drop and its lowest level since October 2023 as all components worsened over the month, the Cabinet Office on Wednesday revealed. Consumer confidence is marking time and the downward revision is the first since September 2023, the office added. The sub-index on asset prices, not included in calculating overall consumer confidence, stood at 45.3 in May, down from 46.9 in April. The share of respondents projecting consumer price gains rose to 93.5 in May from 93.0 in April, the highest level since September 2023 when it stood at 93.7.

FOREX: EUR/GBP Breaks to New Lows on Soft Regional German CPIs

• The single currency is softer against all others, slipping on the back of the lower-than-forecast monthly regional CPI prints from Germany. EUR/USD opened a gap of over 50 pips with yesterday's high upon release, but perhaps more notably the data helped open a further downside leg in EUR/GBP, which broke below key support at 0.8493 to print the lowest level since mid-2022.
• These moves open losses toward 0.8454, the 76.4% retracement for the Mar 7 - Sep 26 2022 bull phase. 
• Weaker US equity futures have done little to underpin the JPY, which sits slightly firmer on the day, but well within recent ranges. However, SEK trades more poorly as EUR/SEK gravitates back toward the 200-dma of 11.4966 - a level pierced into the close yesterday. 
• Focus for the remainder of Wednesday trade is on the preliminary German CPI print for May, at which markets are on watch for downside risks given the seemingly soft turnouts from the regional monthly prints. MNI projects the national CPI broadly inline with expectations, but a lower-than-expected M/M print at 0.0-0.1%. 
• Outside of German CPI, Richmond Fed manufacturing data and an appearance from Fed's Williams are also due, ahead of the latest Beige Book from the Fed.

EGBS: Off Highs as Markets Digest German State CPI

Core/semi-core EGBs are off highs, as markets digest the details of this morning’s German state-level CPI data.

• While the NSA monthly state-level data suggests downside risks to consensus, MNI’s calculations indicate a broadly in line annual print. The transport component is seen boosting services CPI in line with expectations.
• Issuance from Germany (15-year Bund) and Spain (10-year syndication) will also be helping to cap rallies, alongside the firmer crude backdrop.
• ECB’s Kazaks noted that there is no assured subsequent rate path beyond the 25bps June cut, with the “last mile” of disinflation expected to be bumpy.
• Bunds are -38 ticks at 129.64, with yesterday afternoon’s US-led selloff still setting the tone.
• The German and French cash curves have bear steepened, while 10-year periphery spreads to Bunds are generally a touch tighter.
• The 10-year BTP/Bund spread was once again unable to breach 132bps this morning.
• The national German flash inflation print is due at 1300BST

GILTS: Wider vs. Peers

Gilts are just off worst levels, with the softer-than-expected regional German CPI data allowing wider core global FI markets to stabilise.

• Still, gilts are wider vs. all global peers across the curve, given the locality of the German CPI data for EGBs and as UK paper catches up to late NY/Asia weakness in U.S. Tsys.
• Futures last -61 at 98.16 (range 96.12-43).
• Technically, round number support protects the May 1 low (95.87).
• Cash gilt yields are 3.5-4.5bp higher, with the curve a touch steeper.
• 2s breached their early May high during the early London sell off, but the break was only shallow. Yields further out the curve have failed to test their May extremes.
• SONIA futures are also off lows, last flat to -7.0 through the blues. Cycle lows in ’24 & ’25 futures have not been breached.
• Downside plays in Z4 & H5 options were seen during the early sell off in futures.
• BoE-dated OIS is roughly in line with late Tuesday levels, showing ~31.5bp of ’24 cuts and a little over even odds of a 25bp cut come the end of the Sep MPC.
• GBP1bn of 0.125% Mar-39 I/L supply passed smoothly, albeit with a slightly lower cover ratio than the prior offering.
• UK-centric discussions continue to focus on political matters.
• The UK calendar is empty for the remainder of the day, which will leave focus on broader headline flow and national level German inflation data.

EQUITIES: Uptrend in E-Mini S&P Intact Despite Latest Pullback

Eurostoxx 50 futures are in consolidation mode. The recent trend condition remains bullish and the recent pullback appears to be a correction. The contract has recently cleared a key hurdle at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend. This opens 5127.70 next, a Fibonacci projection. Support at the 20-day EMA has been pierced. The next level to watch is 4962.80, the 50-day EMA. The uptrend in S&P E-Minis remains intact and the pullback last Thursday appears to have been a correction. The contract also traded to a fresh cycle high that day, reinforcing a bullish theme. Recent gains have also resulted in a break of 5333.50, Apr 1 high. This confirms a resumption of the primary uptrend and opens 5372.73, a Fibonacci projection. Moving average studies are in a bull-mode set-up. Initial support is 5265.28, the 20-day EMA.

• Japan's NIKKEI closed lower by 298.5 pts or -0.77% at 38556.87 and the TOPIX ended 26.88 pts lower or -0.97% at 2741.62.
• Elsewhere, in China the SHANGHAI closed higher by 1.446 pts or +0.05% at 3111.018 and the HANG SENG ended 344.15 pts lower or -1.83% at 18477.01.
• Across Europe, Germany's DAX trades lower by 81.09 pts or -0.43% at 18597.36, FTSE 100 lower by 14.67 pts or -0.18% at 8239.41, CAC 40 down 49.2 pts or -0.61% at 8008.6 and Euro Stoxx 50 down 20.83 pts or -0.41% at 5009.52.
• Dow Jones mini down 163 pts or -0.42% at 38781, S&P 500 mini down 28.75 pts or -0.54% at 5296, NASDAQ mini down 118 pts or -0.62% at 18822.5.

COMMODITIES: WTI Futures Hold on to This Week's Gains

WTI futures traded higher yesterday and the contract is holding on to its most recent gains. The trend direction remains down and the latest recovery appears to be a correction - for now. A resumption of weakness would signal scope for a move towards $75.64, the Mar 11 low. Key resistance and the bull trigger is at $86.16, the Apr 12 high. Initial firm resistance to watch is at $83.63, the Apr 26 high. Gold is trading just ahead of its recent low. The medium-term trend structure remains bullish and the recent move down appears to be a correction that is allowing an overbought condition to unwind. Moving average studies are in a bull-mode position, highlighting an uptrend. A resumption of gains would open $2452.5 next, a Fibonacci projection. The 50-day EMA, at $2304.2, represents a key support. A clear break of it would be bearish.

• WTI Crude up $0.61 or +0.76% at $80.43
• Natural Gas up $0.01 or +0.39% at $2.6
• Gold spot down $13.41 or -0.57% at $2347.93
• Copper down $1.45 or -0.3% at $484.4
• Silver down $0.02 or -0.07% at $32.091
• Platinum down $8.01 or -0.75% at $1056.53