EUROPEAN EQUITY OPEN: Stocks start lower amid US debt ceiling impasse, Sino-US tensions, hot UK inflation

OVERNIGHT: On Wall Street, stocks Tuesday dropped, while short-term Treasury yields rose, as investors became increasingly anxious over the lack of progress in US debt limit negotiations. Our US wrap is here. In APAC trade, stocks declined amid ongoing US debt ceiling discussions, while NZ markets were in focus after the RBNZ unexpectedly signalled the end of its tightening cycle. In Japan, the first positive Reuters Tankan reading for this year did little to spur risk appetite. China indices were lower after the White House spoke out against China's Micron (MU) ban, while a lawmaker called for the Commerce Department to add Changxin Memory Technologies to the entity list and called to ensure that no US export licenses are granted to firms operating in China which are used to backfill Micron. Our APAC wrap is here.

EUROPEAN OPEN: It is a sour start to the midweek trading session, with European stocks underwater after the open following a continued impasse in US debt ceiling talks, tense US-Sino relations, some fears about a COVID resurgence in China, as well as hot UK inflation data which has seen traders increase hawkish bets on the Bank of England (see our wrap, below). On today’s agenda (more details below), UK CBI industrial trends, Germany Ifo, ECB and BoE speak, as well as the FOMC meeting minutes. Traders will also be attentive to any debt ceiling updates, with nine days to go until the perceived deadline. (see our recap, below).

RECAP – UK INFLATION: UK inflation metrics were hotter than expected in April, with the annual headline rate easing to 8.7% Y/Y from 10.1%, but above the expected 8.2%; the core measure rose to 6.8% Y/Y from 6.2% against expectations that it would be unchanged in the month. Money markets moved hawkishly, and now a +25bps rate rise at the June meeting to 4.75%, is now fully priced. The significant decrease in inflation was driven by a sharp decline in utility prices, which can be attributed to the smaller decrease this year compared to the previous year when prices were frozen under the government's Energy Price Guarantee. Utility inflation is expected to further decrease in July when energy price caps drop below the government's price guarantee. The specific cap for July-September will be announced on Thursday. Meanwhile, the increase in core inflation has pushed the annual measure beyond the previous perceived peak of 6.5% in April of the previous year, reaching the highest levels since 1992. This rise was attributed to an increase in prices for core goods, while the growth in services inflation from 6.6% to 6.9% exceeded the BoE's forecast of 6.7%. "In other words, the recent resilience of economic activity appears to be stoking domestic inflationary pressure," Capital Economics said, adding that "with inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates in June, and perhaps a bit further in the months after." Following the release, money market pricing now sees the UK terminal rate at just over 5.25%  in December (from around 5.00% before the release).

STOCK SPECIFICS: For the FTSE 100, IMI (IMI LN) is indicated to join the UK bluechip index, Ocado (OCDO LN) set to leave, according to a report. In financials, UBS (UBSG SW) estimates that merger with Credit Suisse (CSGN SW) could save USD 8bln by 2027 and increase EPS; the bank is considering options for the combined group's Swiss banking units, has not decided on integration or spin-offs. Legal & General (LGEN LN) bought USD 250mln of bonds in a big debt-for-nature exchange, helping Ecuador reduce its debt and support conservation efforts. UK regulators provisionally find that Citi (C), Deutsche Bank (DBK GY), Morgan Stanley (JPM), HSBC (HSBA LN), and RBC broke competition laws on UK bonds between 2009-2013, and fines may be imposed. Aviva (AV/ LN) reports that its insurance and private health segment grew in Q1. AXA's (CS FP) Venture Partners announced a EUR 1.5bln fund to invest in European and US tech start-ups, looking at companies that are expected to IPO within three-to-four years. MedioBanca (MB IM) 2023-26 strategic plan guidelines have been approved, targets revenue growth of +6%, EPS growth of +15%. Of note for the auto sector, Renault (RNO FP) and Valeo (FR FP) sign a partnership in Software Defined Vehicle development. Michelin's (ML FP) TBC Corporation is to divest its Retail network and to focus on Wholesale, Distribution and Franchise businesses. Italian government said to be keeping an eye on Sinochem's role in Pirelli (PIRC IM) shareholders' pact. In industrials, Siemens (SIE GY) CEO said it will defend and expand its market share in China. In consumer sectors, Marks & Spencer (MKS LN) reported that profits slipped 8% as higher costs weighed. In utilities, SSE (SSE LN) saw profits jump 89% Y/Y. Our full European equity specific briefings for May 24th can be found here and here.

TODAY’S AGENDA:

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  EUROPEAN DATA/SPEAKERS: Germany's Ifo survey will be in focus after mixed flash PMI data for the month; the consensus looks for all three major indices to moderate a little. From the UK, CBI industrial trends data is on the docket. It is a quieter day for ECB speak, although the ubiquitous President Lagarde will be giving another set of remarks at an event celebrating the ECB's 25th Anniversary. Riksbank officials, have been similarly ubiquitous, will make further appearances today, via Riksbank's Jansson speaking on the economic situation, while Floden will speak at a Swedish Farmers Federation event. On the supply front, Germany will sell EUR 1.5bln of 2038 Bunds, and EUR 1.0bln of 2040 debt; from the UK, the DMO will sell GBP 3bln of 2033 Green Gilts.


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  US DATA/SPEAKERS: The data release slate is quiet; weekly MBA mortgage applications data is due. However, it is the Fed meeting minutes that will garner most attention. That said, the minutes are somewhat stale given the more recent Fedspeak, which has taken a mixed tone. Nonetheless, participants will be looking to see the extent to which the minutes reflect these divergent views and, indeed, how much a potential pause was discussed at the May meeting (see below). Fed Governor Waller will speak at a university event; influential leaders like Powell, Jefferson and Williams have more or less advocated for a hold in June, although Waller leans more hawkishly than these officials. On the supply front, the Treasury will sell USD 22bln of 2yr FRNs, as well as USD 43bln of 5yr notes.


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  US CORPORATE EARNINGS: Numbers from ADI and NVDA; the latter will be particularly noteworthy given its prominence in the AI space. Our Daily US Earnings Estimates note can be accessed here.


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  ENERGY:  API weekly energy inventory data reportedly showed crude stocks -6.8mln bbls (exp. +0.8mln), Cushing +1.7mln, Gasoline -6.4mln (exp. -1.1mln), Distillate -1.7mln (exp. +0.4mln). Citi said the data is bullish across the board, if confirmed by the more definitive DOE report due later on Wednesday.


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  FOMC MEETING MINUTES (19:00BST/14:00EDT): At the May meeting, the FOMC raised rates by 25bps to 5.00-5.25%, in line with expectations, while also hinting at a 'pause' (more on that in a moment) by dropping the language about anticipating more policy firming. The Fed will determine further policy firming based on tightening to date, policy lags, and other developments, Fed Chair Powell said, adding that the central bank remains committed to bringing inflation back down to target and will take a data-dependent approach to determine further rate hikes, adding that there would be an ongoing assessment of whether the Fed has reached a 'sufficiently restrictive' level. The Senior Loan Officer Opinion Survey (SLOOS) was consistent with banks tightening lending standards and slowing the pace of lending. At the same time, the Committee believed that inflation would take a while to come down. Powell also said they are much closer to the end than the beginning; feels as if the Fed is close, or maybe even there. Since the May meeting, officials have emphasised that their latest policy actions should not be read as a 'pause', and the Committee is prepared to act further to tame inflation pressures. Post-FOMC, Fedspeak has become more nuanced regarding the differences in views over the policy outlook, and some divergences are emerging. In the outright hawkish camp, Logan (current voter) argued that the data does not yet show that skipping a rate hike in June is appropriate, and Governor Bowman (permanent voter) said additional rate hikes were likely appropriate. In the neutral-but-with-hawkish elements camp, Bullard (non-voter) said he would keep an open mind going into the June meeting but was inclined to support another rate hike whilst discussing the need for another 50bps of tightening looking through the year. Bostic (2024) said there was still a way to go to beat inflation. The influential NY Fed President Williams and Vice Chair Nominee Jefferson (both voters) adopted a more circumspect view, speaking about how inflation remains too high, but offsetting that by leaning into the monetary lags view, saying a year is not enough time to assess the full impact of hikes thus far. Chair Powell took this line, which for some, all but confirms that rates would be on hold at the June 15th meeting announcement. Fed's Kashkari (current voter), who has until recently been one of the outspoken haws, doved it down after comments from Chair Powell, suggesting that he may be able to support an unchanged outing in June, or in his words, a 'skip'. Chicago Fed's Goolsbee (current voter) has been one of the vocal doves in recent weeks, repeatedly warning about the risks of overtightening in the fallout of the banking episode. (Newsquawk)


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  DEBT CEILING LATEST: On Tuesday, the White House and Congressional Republicans faced challenges in reaching an agreement to increase the US borrowing limit, with the uncertainty posing risks to the economy and financial markets, with just nine full days till the estimated debt-limit deadline of June 1st. Republican House Speaker McCarthy and negotiator Graves signalled an impasse, but both remain in deal-seeking mode. Speaker McCarthy said that he hadn't spoken to President Biden, and wasn't scheduled to visit the White House on Tuesday, but emphasized commitment to working until everything is resolved. McCarthy accused Biden and the White House of attempting to involve Medicare and Social Security to disrupt negotiations. House Financial Services Chair McHenry said that the primary disagreement remains on spending, and it is uncertain when negotiations will resume. Republican negotiator Graves mentioned that no further meetings were scheduled, but said that they have made progress in some areas, while still facing significant differences on the debt limit duration. Elsewhere, the White House acknowledged that using the 14th Amendment to bypass the debt ceiling wouldn't solve the current problem but didn't rule out considering the strategy if an agreement can't be reached.


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  RECAP – RBNZ: The RBNZ lifted rates by 25bps to 5.5%, and suggested that it will not be raising interest rates further after lifting the OCR to the highest level in over 14 years. The decision surprised the market, as some expected (and still expect) more rate hikes. Westpac notes that the Committee had a vote for the first time on whether to keep rates the same, or raise by 25bps; Two members voted for no change, while the others voted for the increase. Policymakers also talked about the possibility of higher house prices and economic risks from migration, but overall, the Committee believes that a 5.5% interest rate will help manage those risks. "The bottom line is that this is a central bank that sees itself on hold for a protracted period," Westpac wrote, "key risk factors are likely to be around the judgement of the RBNZ that the quite significant boost in population growth will quickly reverse and not add to housing market or inflation pressures," and the bank added that "data on house prices and migration will be important to watch in that regard, and similarly labour market indicators will be important to watch." Westpac now sees that RBNZ on hold in July, but warns that there remains some potential for a +25bps hike in August. "Should this not eventuate we anticipate the RBNZ to remain on hold until after the election in October," adding that "by this time we expect that the housing market and migration pressures will be showing up fairly strongly and require a further adjustment in the OCR to the 5.75-6.00% range."

24 May 2023 - 08:10- Data- Source: Newsquawk