MNI US OPEN - UK Facing Higher-for-Longer Rates as CPI Proves Sticky

NEWS

US (BBG): McCarthy, Graves Signal Impasse in White House Debt Talks

Speaker Kevin McCarthy left the US Capitol late Tuesday afternoon saying the two parties had yet to reach a deal to avert a first-ever US default, and a top lieutenant said there are no more meetings planned. Republican Representative Garret Graves, one of McCarthy’s chief negotiators, suggested just hours after a two-hour meeting in the Capitol with his White House counterparts that the two sides were at a standoff.

US (NYT): DeSantis Set to Announce 2024 Run on Twitter With Elon Musk

Adding a twist to the beginning of his presidential campaign, the Florida governor is expected to appear on a live audio conversation with Mr. Musk, the social platform’s owner, on Wednesday evening. Gov. Ron DeSantis of Florida is planning to announce the start of his 2024 presidential campaign on Wednesday in a live audio conversation on Twitter with Elon Musk, the platform’s polarizing owner, according to people with knowledge of his plans.

US (BBG): US Must Widen China Chip Curbs in Micron Riposte: Lawmaker

A prominent US lawmaker is urging Washington to strike back against China for its decision to bar Micron Technology Inc.’s memory chips, threatening to further inflame tensions between the two countries. Mike Gallagher, a Wisconsin Republican who leads an influential Chinese-focused Congressional committee, wants Changxin Memory Technologies Inc. placed on a blacklist that effectively bars dealings with American firms.

EU (BBG): EU Banks Are Said to Sail Through Early Round of Stress Tests

Many large European banks are emerging from early rounds of a key stress test in robust financial health, prompting some regulators to question whether to push harder at a time when investors are focused on the industry’s resilience. Initial submissions to the European Banking Authority’s biennial assessment show several lenders’ capital ratios are higher than in previous exercises under the so-called adverse scenario, people with knowledge of the matter said, asking to remain anonymous as the submissions are private.

UK (MNI): Structurally Higher Rates to Sap UK House Prices

Flat or rising real interest rates, underpinned by a structural decline in demand for gilts, and a shift to working from home are set to exert downward pressure on UK house prices after decades of strong growth, a former Bank of England Monetary Policy Committee member and top Office for Budget Responsibility official told MNI.

RBNZ (MNI): RBNZ Hikes OCR to 5.5% "Peak," Rates Restrictive

The Reserve Bank of New Zealand has raised the Official Cash Rate 25bp to its forecasted 5.5%, warning rates will stay higher “for the foreseeable future” as it aims to pull inflation back down to its 1-3% target. The RBNZ noted in its quarterly Monetary Policy Statement published alongside the decision that the OCR had likely reached its peak and forecasted a slightly faster pace of cuts.

RBNZ (MNI): Lower GDP Surprise, Higher OCR Working

New Zealand will likely experience a recession, despite the Treasury’s recent forecasts to the contrary, illustrating that the interest-rate sensitive parts of the economy are starting to slow, according to Reserve Bank of New Zealand officials. At a press conference following the Reserve’s decision to hike the Official Cash Rate 25bp to 5.5%, Chief Economist Paul Conway said the RBNZ expected the economy to record two consecutive quarters of negative GDP, with Q2 declining 0.1-0.2%, following 0.3% growth over Q1.

JAPAN (MNI): PM to Attend NATO Summit; Plans for Liaison Office Rile China

Japanese Prime Minister Fumio Kishida will attend the NATO summit in the Lithuanian capital Vilnius in July as an invitee. The news comes after Kishida stated to the House of Representatives that Japan would not become a member or semi-member of the defence alliance, but did not deny the prospect of a NATO liaison office being established in Tokyo.

RUSSIA (MNI): Russian Premier Says China Ties at ‘Unprecedented’ Level

Russian Prime Minister Mikhail Mishustin told China’s premier that bilateral relations are stronger than ever, as Moscow looks to Beijing to help it withstand the economic pressure of US-led sanctions. “Today, relations between Russia and China are at an unprecedented high level,” Mishustin told Premier Li Qiang in Beijing on Wednesday.

GREECE (MNI): President Set to Appoint Caretaker PM Ahead of New Elections

As expected, the Greek presidency has confirmed that President Katerina Sakellaropoulou is set to appoint a caretaker prime minister to oversee the gov't ahead of a new set of elections that are likely to take place in late-June. Under the Greek constitution, a senior judicial figure is appointed to lead the gov't in the interim period. Wires reporting that according to the leader of centre-right New Democracy Kyriakos Mitsotakis, the new round of elections will take place on 25 June.

BRAZIL (BBG): Brazil Lower House Approves Lula’s New Fiscal Framework Proposal

Brazil’s lower house of congress on Tuesday approved its version of the government’s new fiscal framework proposal, President Luiz Inacio Lula da Silva’s main legislative priority. The main text of the proposal, designed to replace the so-called spending cap rule while seeking to shore up Brazil’s public finances, passed with 372 votes in favor and 108 votes against. Amendments that can change the main text are expected to go to a vote before the proposal moves on to the Senate, where it needs the support of 41 the chamber’s 81 lawmakers.

DATA

UK DATA (MNI): UK Inflation Falls, But BOE to Focus On Core Spike

• UK APR CPI +1.2% M/M, +8.7% Y/Y
• UK APR CORE CPI +1.3% M/M, +6.8% Y/Y
• UK APR RPI +1.5% M/M, +11.4% Y/Y
• UK APR OUTPUT PPI +0% M/M, +5.4% Y/Y
• UK APR INPUT PPI -0.3% M/M, +3.9% Y/Y

UK headline inflation slowed sharply in the year to April, the Office for National Statistics said Wednesday, although core inflation jumped to the highest level since March 1992. Headline inflation fell to 8.7% year on year, while core CPI came in at 6.8%. Within services, good inflation slowed, but services inflation rose from 6.6% to 6.9% y/y -- also the highest since March '92. The data was above expectations of financial market economists, who had predicted a dip to 8.2%. The Bank of England expected inflation to fall sharply in April, with another leg lower expected in May.

GERMAN DATA (MNI): IFO Survey Dips in May as Firms Brace for Weakening Demand

• GERMANY MAY IFO BUSINESS CLIMATE 91.7 (FCST 93.0); APR 93.4r
• GERMANY MAY IFO CURRENT COND 94.8 (FCST 94.7); APR 95.1r
• GERMANY MAY IFO EXPECTATIONS 88.6 (FCST 91.6); APR 91.7r

The Germany IFO survey was more downtrodden across the business climate, current and expectations indicators in May. The business climate index weakened by 1.7 points to 91.7, lower than the 93.0 expected, breaking a six-month streak of improvement. Current conditions were only marginally worse at 94.8 (down 0.3 points), whilst expectations dipped 3.1 points to 88.6 against consensus expectations of largely holding steady. Manufacturing confidence was significantly worse in May, with declining demand underpinning a fall in expectations, which was the steepest since the onset of the Ukraine war in March 2022.

CHINA DATA (MNI): China Car Exports to Remain Strong

China’s car exports will remain a significant contributor to export growth in 2023, after the country passed Germany to lag only Japan for foreign auto sales by volume in 2022, fuelled by demand for cheap electric vehicles and as domestic firms shift units abroad amidst a fierce price war at home. Exports soared 70.6% to 994,000 units in Q1 y/y, almost five times the 204,000 units shipped in Q1 2020, according to the China Association of Automobile Manufacturers (CAAM).

FOREX: GBP U-Turn as Inflation Inspired Rally Fades Fast

• UK markets have drawn focus across the European morning following the higher than expected CPI print for April. While headline CPI dipped to 8.7% from 10.1% prior - it was a far slower step-down for inflation pressure, and core also accelerated to 6.8% from 6.2%. As a result, markets have rushed to price in a higher-for-longer approach at the Bank of England, tipping the assumed peak policy rate close to 5.50% for the first time since the fallout of the Truss budget last year.
• GBP's initial inflation-inspired rally faltered following the Gilt open, with markets returning to the previously observed pattern of selling the currency alongside notable increases in short-end rates. GBP/USD corrected off the high of 1.2470 down to the 1.2400 handle on heavy volumes, with activity across futures markets over double what you'd expect to see at this time of day.
• Despite GBP's reversal lower, NZD remains the poorest performer in G10 following the RBNZ rate decision. The bank raised rates by 25bps - as expected - but unexpectedly signaled that their tightening cycle has now concluded, resulting in NZD/USD dropping below 0.6150 for the first time since April.
• Focus turns to central bank appearances later today, as BoE's Bailey speaks at a WSJ event, ECB's Lagarde marks the 25th anniversary of the ECB and Fed's Waller talks on the economic outlook. The FOMC minutes also cross.

BONDS: Gilts Routed Post-CPI; BoE's Bailey, Fed Minutes Eyed Later

Gilts have dropped sharply after a much-higher-than-expected UK April inflation print, easily underperforming Bunds and Treasuries in early Wednesday trade.

• The upside shock in UK CPI (core 6.8% Y/Y vs 6.2% expected) pushed BoE terminal rate pricing up over 40bp at one point to 5.50%, putting 2Y UK yields on course for their biggest rise since Sept 2022 (up 25bp at time of writing to 4.39%) in a strong bear flattening move.
• Yields are off session highs but given the increasing focus on the BoE's path ahead, Gov Bailey's appearances today (particularly a fireside chat at 1400UK time) will garner additional attention.
• Treasuries and Bunds have fared better, with the US curve twist steepening and Germany's twist flattening.
• German IFO was on the weak side of expectations, but appeared to help Bunds bounce from an early UK-related selloff. We hear from ECB's Lagarde later.
• There's no key US data today, but in Fed communications, we hear from Fed's Waller, and later, the May FOMC minutes (MNI preview is here).
• In US supply we get $43B in 5Y Note and $22B 2Y FRN auctions.

Latest levels:

• Jun US 10Y futures (TY) steady at at 113-19.5 (L: 113-13 / H: 113-23.5)
• Jun Bund futures (RX) up 13 ticks at 134 (L: 133.46 / H: 134.18)
• Jun Gilt futures (G) down 76 ticks at 96.17 (L: 94.94 / H: 96.26)
• Italy / German 10-Yr spread 1.1bps wider at 186.3bps

EQUITIES: Eurostoxx Futures Dip Lower Again, Piercing Support at 20-Day EMA

Eurostoxx 50 futures traded lower Tuesday. For now, the pullback appears to be a correction and trend signals continue to point north - moving average studies remain in a bull mode position. The contract has tested support at the 20-day EMA, which intersects at 4323.50. A clear break would expose the 50-day EMA at 4266.30. On the upside, the bull trigger has been defined at 4409.00, the May 19 high. A break would resume the uptrend. The S&P E-minis outlook remains bullish and yesterday’s pullback is considered corrective - for now. Trend signals highlight an uptrend and the focus is on a climb towards 4244.00, the Feb 2 high and the next important resistance. On the downside, the 20-day EMA has been tested. A clear break of it would expose the 50-day EMA which intersects at 4124.34 and marks a key support.

• Japan's NIKKEI closed lower by 275.09 pts or -0.89% at 30682.68 and the TOPIX ended 9.09 pts lower or -0.42% at 2152.4.
• Elsewhere, in China the SHANGHAI closed lower by 41.488 pts or -1.28% at 3204.75 and the HANG SENG ended 315.32 pts lower or -1.62% at 19115.93.
• Across Europe, Germany's DAX trades lower by 197.53 pts or -1.22% at 15955.28, FTSE 100 lower by 116.21 pts or -1.5% at 7644.8, CAC 40 down 105.44 pts or -1.43% at 7273.97 and Euro Stoxx 50 down 58.83 pts or -1.35% at 4284.37.
• Dow Jones mini down 34 pts or -0.1% at 33086, S&P 500 mini down 3.75 pts or -0.09% at 4153, NASDAQ mini down 8.25 pts or -0.06% at 13714.25.

COMMODITIES: Recent Gains in WTI Futures Considered Technically Corrective

A short-term bearish theme in WTI futures remains present and the latest gains are still considered corrective. Trend signals point south - moving average studies continue to highlight a downtrend. A resumption of weakness and a break of $69.39, the May 15 low, would strengthen near-term bearish conditions. On the upside, resistance is seen at $74.41, the 50-day EMA. A clear break of this level would alter the picture. 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 $1929.1, 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 up $1 or +1.37% at $73.92
• Natural Gas up $0.02 or +0.73% at $2.338
• Gold spot up $1.04 or +0.05% at $1976.77
• Copper down $5.2 or -1.42% at $360.3
• Silver down $0 or 0% at $23.444
• Platinum down $7.74 or -0.73% at $1047.81