US EARLY MORNING: Cauious trading conditions are being seen ahead of today's CPI data, and as debt talks fail to yield any breakthrough

OVERNIGHT: On Wall Street, stocks trended lower on Tuesday with losses led by the Nasdaq 100, as Technology an underperformed, though stocks were generally lower across the board. Our US market wrap can be accessed here. Fiscal talks between President Biden and Congressional leaders did not yield any significant progress, but talks will continue throughout the week, and Biden will meet leaders again on Friday (see debt talks section, below). In the APAC session, stocks were mostly lower as the region digested a slew of earnings updates and following the weak handover from Wall Street. Aussie shares saw underperformance in financials, energy and telecoms but with losses stemmed by defensives and as participants mulled over the details of the recent federal budget. China stocks conformed to the global downbeat mood, while a report which said Chinese GDP growth was likely to pick up in Q2 due to policy support did little to spur risk appetite. Our Asia wrap is here. European equities open with mild gains; final German inflation data for April was unrevised. ECB speak was leaning somewhat dovish, with the ECB's German representative Nagel suggesting that the central bank's rate hike policy may be moving into the final stretch, even though there is further to go; this theme has been echoed by ECB's Stournaras, who thinks that rate rises will be over this year. Our European morning opening note is here.

US PRE-MARKETS: Ahead of today's key CPI data for April, US equity futures are mixed but not too far off flat, continuing the horizontal trading patterns seen since last month. Treasury yields are mixed, with the short-end a little higher, though long-end yields are moderately lower ahead of today's sale of 10yr notes. The Dollar Index is sub-neutral, albeit not by that much. Crude futures are in the red following a surprise build reported by the API afterhours on Tuesday. Debt talks in Washington failed to yield any breakthrough; talks will continue this week, and President Biden will meet Congressional leaders again on Friday (see below for more). Today's main event is the CPI report for April, and although the Fed is in a conditional pause regarding rate hikes, the data could sway that narrative if it comes in hotter than expected (our preview is below). On Tuesday, Fed's Williams struck a hawkish tone, warning that the central bank would resume hikes if the situation demanded.

US DEBT TALKS: Congress' leaders from both parties and President Biden did not make significant progress in their meeting to avoid a US debt default. Both parties did not compromise from their positions, and Biden and Senate leader Schumer claimed there was nothing to negotiate. Talks will continue during the week, and party leaders will begin discussing a possible budget and spending deal as soon as Tuesday evening, moving closer to pairing the debt limit with another major issue. Biden will meet House Speaker McCarthy, Senate Leader Schumer, Senate Minority Leader McConnell and House Minority Leader Hakeem Jeffries again on Friday. Biden said he was mulling the use of the 14th Amendment to circumvent the debt ceiling standoff, although he doubts its effectiveness and acknowledges that it would have to be litigated. Proponents of the idea argue that the Amendment makes it unconstitutional for the government to stop paying its debts. Treasury Secretary Yellen has previously said that the US should not be in a position where it needs to consider whether or not the 14th Amendment applies, describing that as a “disastrous situation that the country shouldn’t be in.”

PREVIEW - US CPI (13:30BST/08:30EDT): Headline CPI is seen rising +0.4% M/M in April, picking up from the 0.1% M/M pace in March; the annual measure is seen unchanged at 5.0%. Core inflation is seen rising 0.4% M/M in April, matching the rate of growth seen in March, while the annual measure of core inflation is seen easing a touch to 5.5% Y/Y (prev. 5.6%). JPMorgan and Goldman Sachs both think that If inflation is lower than expected on Wednesday, US stocks could rally if the data is lower than expected as traders will bet that the Fed will then stop rate hikes; if the annual rate of headline inflation comes in sub-5.0%, S&P could rally by at least 0.5% GS said, while any reading above 5.9% could drag stocks lower by at least 2%, writing that “the cooler the data the better for stocks right now.” Meanwhile, JPMorgan thinks that the most likely scenario is for CPI to print between 5.0-5.2%, which could see the S&P 500 rise by 0.5-0.75%; on the other side, it thinks that if inflation comes in above 5.5%, stocks could slide by more than 3.0%. This week, the influential NY Fed President Williams (who is also the FOMC Vice Chair) said that although the Fed had made significant progress in taking action to lower the high levels of inflation, it was too soon to say if the Fed is done with rate hikes, adding that policymakers would not hesitate to act if further action was required. Ahead of the data, money markets are suggesting that rates have already peaked, and are pricing around 63bps of cuts (implying two 25bps rate cuts, and a decent chance of a third) by the end of this year. Williams, however, said the Fed must keep a restrictive stance of policy in place for quite some time to make sure that inflation does come down to the 2% target, and in his baseline view, does not see any reason to cut interest rates this year.

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10 May 2023 - 09:00- Research Sheet- Source: Newsquawk

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