US EARLY MORNING: US equity futures are around flat; House passes debt measure; US labour market metrics to set the scene for Friday's NFP

OVERNIGHT: On Wall Street, stocks were lower after weak China official PMI data, while the Chicago PMI data was below expectations, and there was a surprise spike in JOLTS job openings, which continues to show labour market strength. The USD gained, supported by yield differentials. Nvidia (NVDA) closed lower amid profit taking into month-end, although the Nasdaq still closes the month +6%, while the SPX was flat in May. Our US wrap is here. APAC stocks rose after the US House voted in favour of suspending the debt limit (see below), while Chinese Caixin manufacturing PMI data showed an improvement, in contrast to the official PMI data released earlier in the week, helping to lift Chinese shares. Aussie shares gained after strong capex data. Nikkei 225 was supported by robust business capex and profits. Our APAC wrap is here. The mood was constructive in Europe given the positive tailwinds from Wall Street/APAC; additionally, German retail sales data also improved. It is a heavy data slate today in Europe, with the primary focus the inflation metrics for May, which are expected to show a cooling in line with national reports released this week. Our European cash open note is here.

US PRE-MARKETS: US equity futures are around the neutral mark in pre-market trade. Lawmakers have made progress is in attempting to suspend the debt ceiling, decent manufacturing data out of China overnight, while slowing Eurozone inflation also reduces expectations of a hawkish monetary impulse are the themes underpinning global equities. US Treasury yields are rising by 2-7bps, with much of the underperformance in the short-end of the curve. Market pricing for the Fed’s June meeting has been fluctuating, at one point on Wednesday implying a 70%+ chance of a 25bps rate hike, though are now back to pricing an unchanged outing, though there is not a lot of high conviction in that view. Influential Fed officials have been guiding towards a hold in June, but have caveated their views around the tone of incoming data. As we noted yesterday, we are now entering a key data window that could influence the Fed: ISM manufacturing data is out today, along with ADP/Challenger/weekly jobless claims data, all ahead of Friday's NFP report; the services ISM is out on Monday, and a day before the Fed announcement, the CPI report will be released (during the Fed blackout). The Fed will enter blackout at the end of this week ahead of the June 13-14th policy meeting. We also note that concerns around the banking sector are refusing to fully dissipate (see below).

DEBT CEILING: The Republican-controlled House approved a bill by a margin of 314-117. The legislation extends the government’s borrowing limit until January 1st, 2025, enabling President Biden and Congress to defer the politically sensitive matter until after the November 2024 Presidential Election. The Bill imposes spending limits for two years, streamlines permitting for select energy projects, recovers unused COVID-19 funds, and broadens work requirements for food aid programmes. House Leader McCarthy lost the support of 71 in his own party, but 149 Republicans eventually backed the bill, joined by 165 Democrats, allowing it to pass via a simple majority. Fox News noted that more Democrats voted for the Bill than Republicans. Now the bill goes to the Senate, where Majority Leader Schumer plans to schedule votes later this week. Senators may propose amendments to expedite the process, Politico said. Schumer and Senate Minority Leader McConnell aim to finalise the bill and send it to President Biden before the weekend, but Schumer warned that lawmakers cannot risk amending the debt bill and sending it back to the House. The deadline to pass the bill is June 5th, when the government’s borrowing limit is expected to be reached.

US BANKS: US banks underperformed on Wednesday amid concerns surrounding the commercial real estate sector, after executives from Wells Fargo and Blackstone expressed worries about potential losses in office real estate loans at a conference. Wells Fargo assured investors that the bank is actively managing its portfolio, and not overly concentrated in that area, while Blackstone highlighted the unprecedented weakness in older office buildings. Meanwhile, Fed Governor Bowman said residential real estate appears to be rebounding, with implications for the Fed’s inflation battle; the Fed has been trying to take some of the heat out of the real estate market as it tries to combat high inflation. In recent months, Fed officials have been sounding warnings over commercial real estate, and the impact it could have on the nation’s financial system, and have expressed concerns over the loans provided to office landlords. Goldman Sachs warns that there could be more regulation aimed at banks to improve capital levels in the near- and medium-term. In reviewing large bank regulatory capital, GS says capital adequacy for the large cap banks continued to improve in Q1, with more constrained firms adding up to 60bps to excess capital through a mix of retained earnings and mitigation. However, it sees “continued increases in capital requirements over both the near- and medium-term from a variety of factors, which leads us to expect the top seven banks to continue to operate in a capital-constrained manner, in terms of limiting growth in more capital-consumptive products and continuing to mitigate in areas, including buying CDS.”

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01 Jun 2023 - 09:04- Research Sheet- Source: Newsquawk

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