US EARLY MORNING: Equity futures are flat; debt ceiling talks make progress but still no breakthrough; more retail earnings ahead

OVERNIGHT: On Wall Street, it was a risk off session on Tuesday, with the majority of stocks and indices in the red; the only pockets of strength were in Tech and large-cap names. US retail sales data was mixed while Industrial production and manufacturing output were above expectations; the Fedspeak was also heavy. Our US wrap can be accessed here. Overnight, Asia-Pac stocks were mixed with the region cautious after the weak handover from the US, where risk appetite was clouded amid debt ceiling concerns; a meeting between US President Biden and congressional leaders achieved no major breakthroughs (see below). On the data front, Japan emerged from recession in Q1, growing more quickly than analysts had anticipated. Our APAC wrap is here. Stocks start the European day beneath the neutral line ahead of final Eurozone inflation metrics, which are expected to be unrevised. Our European cash open note is here.

US PRE-MARKETS: US equity futures have given up the modest upside seen overnight, and are trading around flat, continuing the horizontal action that has been seen since April. Debt ceiling talks were being framed as constructive by officials, and while some pockets of progress were cited, the impasse remains (see below). Hawkish Fedspeak continues post the May policy meeting, with officials keen to impress that the Committee has not concluded rate rises, and will act if inflation dynamics warrant further tightening; Chair Powell will likely reiterate this theme in remarks due Friday. We get a breather from the Fedspeak today, but the docket for Thursday (VC nominee Jefferson, VC Barr, Logan) and Friday (Chair Powell, Williams, Bowman) is busy. Treasuries are mixed, with the short-end a little off neutral, though the longer end is seeing yields down by around 3bps; we get 20yr supply later today. The Dollar Index is a little higher,; analysts cite the lack of progress in Washington which will keep defensive dollar positions in focus. Crude benchmarks are lower after API data reportedly showed a surprise build in crude stocks; the more widely viewed DoE data is released later today.

US DEBT CEILING: President Biden and Republican leaders expressed cautious optimism that a deal to raise the US debt ceiling was within reach, following talks at the White House on Tuesday, BBC reports. But House Speaker Kevin McCarthy said that the two sides remained far apart. That said, it appears that the threat of a default has been taken off the table: McCarthy was asked about the risk, and he said that "we've already taken default off the table." McCarthy said that a Biden-appointed representative would negotiate directly with his staff, which he said was a sign that the structure of how the sides negotiate has improved. Biden has also cut short his Asian visit, cancelling a visit to Australia and Papua New Guinea to focus on the debt limit standoff; the President will however still travel to Japan on Wednesday for the G7 meetings, and will return to the US on Sunday. Separately, over 140 leaders of the biggest US companies including Goldman Sachs (GS), Pfizer (PFE) and KKR (KKR), have urged the White House and congressional leaders to raise the debt ceiling and avoid a “potentially devastating scenario”, FT reports.

GS ON MARGINS: In its outlook for S&P 500 profit margins, Goldman Sachs said that in the near-term, the worst of the profit margin reset is likely behind us. The bank notes that Q1 saw margins improve and are now expected to stabilise, though there remain some challenges to margin expansion due to factors like wage growth, interest rates, and inventories, as well as the risk of a recession. In the long-term, Goldman says that the major margin tailwinds of the last 30 years are unlikely to provide much boost in coming years. It says that since 1990, profits for companies in the S&P 500 have increased by 700bps, contributing to 40% of the overall stock market gains. The main factors behind that was the cost of goods sold, taxes, and interest rates. However, these factors may reverse in the future, GS warns, risking a decline in returns. The bank says AI is seen as a potential long-term solution to support profit margins, with estimates suggesting it could increase profits by nearly 400bps over ten years, but there remains uncertainty regarding the economic impact of AI and the regulations it may face.












17 May 2023 - 09:01- Fixed IncomeData- Source: Newsquawk

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