: Equities up, Treasuries down, Crude up, Dollar up.
Housing data mixed; average 20yr auction.
The following are some of the most effective ways to reduce your risk.
US IJC (International Monetary Committee), Philadelphia Fed, Existing Home Sales
ECB: Lagarde; BoE: Pill, Broadbent; Ramsden; Tenreyro
Walmart Holiday: Ascension Day.
Newsquawk in two easy steps
The session ended with a rally in the stocks, with many desks citing optimism about debt ceilings, better consumer earnings and an optimistic update from regional banks. Western Alliance (WAL), which provides a positive deposit update to regional banks, helped them surge. Target (TGT), TJX (TJX), and Home Depot (HD), however, did not have as poor a report as Tuesday's Home Depot (HD). Biden's decision to cut short his Asia tour to negotiate the debt ceiling, as well as McCarthy and Biden naming top emissaries for negotiations has helped to spin the sentiment around it positively. Treasuries have been flattened in cross asset terms (2s +8bps and 30s flat), as the debt ceiling and banking concerns fade. The implied hike for June is still at 20%, but the pricing has become more dovish. Eyes are now on the Philly Fed Survey on Thursday, and Powell on Friday. As risk appetite improved on Wednesday, the Dollar lost some of its initial strength. Risk currencies recovered while havens were offered. Note that the Yuan has been in the spotlight after USD/CNH fell above 7,0000 for the very first time since the end of 2022 due to overarching economic woes. Oil prices rose in line with stocks (and the Dollar) as a result of a larger-than-expected increase in US crude stockpiles. Copper prices also rose on the Dollar's reversal and helped commodity currencies. Precious metals remained relatively unchanged.
He said that he would continue the talks throughout the G7 week and will keep in touch with the negotiators while he's away. He also suggested that there was a chance of adding some work requirements to the bill. However, he would not accept any requirements which will impact the needs of the people. McCarthy, the Republican House Speaker, reiterated that they can reach a consensus on a debt limit by Sunday and expressed optimism about their ability work together. House Democratic Leader Jeffries announced that the House Democrats would file a discharge petition to raise the debt ceiling in the event it was necessary. NBC reported that progressive Democrats were urging Biden, in order to avoid a default without Congress's help, to be prepared to invoke the 14th Amendment to raise the debt limit.
US housing starts increased to 1,401mln in April (exp. The number of housing starts in the US rose to 1.401mln (exp. Pantheon Macroeconomics notes that "the increase is more or less evenly divided between single-family and multi-family unit, roughly in line with levels implied by permits previously granted." Building permits dropped to 1.416mln, from an upwardly revised 1.437mln initially 1.43mln. This was below the consensus estimate of the 1.437mln. Pantheon reports that "the small decline in building permits in April is due entirely to a 7.7% drop in the multifamily component. This component is subject to wild swings from month to month but has been trending in a sideways direction for more than a year". According to the consultancy, the residential construction sector is stabilising. This was a major drag on investment in 2022.
T-NOTE (M3) FURNITURES SET 11 TICKS BLOWER AT 114-18+
Treasuries fell as stocks soared due to positive regional banking news and optimism about the debt ceiling. The Fed is now responsible for fighting inflation.
The following are the results: 2s +8.0bps @ 4.154%; 3s +10.2bps @ 3.815%; 5s +10.6bps @ 3.590%; 7s +14.9bps @ 3.582% ; 10s +10.0bps@ 3.579%.
5yr BEI -4.5bps @ 2.177%; 10yr BEI -2.6bps @ 2.240%; 30yr BEI +1.66bps @ 2.281%
Treasuries continued their recovery in the morning of Tokyo on Wednesday. The long end led the way, whereas the front end was hampered by Tuesday's hawkish Fed Speak, strong retail sales and IP data. Before Europeans arrived, T-Notes reached interim highs of 115-02+. The losses were however capped by solid auction results from France, Germany and the UK. JPM's bullish UST forecast also received a lot attention.
T-Notes dipped as corporate supply, which included 10+ issuers, was announced. Housing starts and permits were mixed, which was accompanied with front-end sales. However, this may have been more a result of the recent Reuters survey right before it. 75/116 economists surveyed predicted the Fed rate would be at 5.00-5.25 (current level) by the end of the calendar year vs the current 4.25-4.50 priced. After 09:00 ET, a massive 26k block of 5yrs buyers sent the curve soaring. T-Notes reached session highs at 115-03.
The selling continued into the afternoon, as T-Notes fell through Tuesday's 114-23 low, eventually hitting troughs of 114-17 (ahead of the May 1st low at 114-10), after the 20yr auction passed, which saw average demand compared to the sector's recent history. After the 20yr auction, which saw average demand for the sector, the selling continued into the afternoon. T-Notes fell through the Tuesday low of 114-23 and eventually hit troughs at 114-17, ahead of the May 1st lowest low of 114-10. The Note 2yr T notes printed new MTD lows of 102-261, ahead of the low of April of 102-247. Rate expectations are largely in 1yr1yr and June pricing is resistant to bake more hike premia than 20% implied. Powell's Friday speech could be pivotal.
The Treasury held a fairly successful 20-year bond auction, selling USD 15bln in new issue bonds at 3.954%. This is slightly higher than the April stop of 3.92%. The auction saw the WI stop through by 1bp, as is normal for 20yr papers at this stage. This can be seen in the six-auction average. The auction saw a 1bp break-through, which is customary for 20yr paper at this stage. This can be seen in the six-auction average. Last month's 0.2bp outlier was also an anomaly. The constant stop-throughs are consistent with the idea that participants use primary offerings in order to achieve a yield pickup: 20yr is c.50bps cheaper on the 10s20s30s and is the second-highest yield tenor of the coupon curve, after the 2yr. Dealers (forced excess buyers) took home 11.3% of the total, a lower percentage than last month (12%) but above the average takedown (9%). This is indicative that the cohort had to backstop auctions to a greater extent than usual, with Indirects taking fewer than average.
Thursday and Friday
Survey, IJC, existing home sales, 10yr TIPS auction, Banxico, Fed's Jefferson, Barr, and Logan; (Fri) G7 Summit in Japan, SARB, Japanese CPI, Fed's Williams, Bowman, and Powell. Survey, IJC, existing homes sales, TIPS 10yr auction, Banxico, Fed’s Jefferson, Barr, Logan. (Fri), G7 Summit, SARB, Japanese CPI, Fed’s Williams, Bowman, Powell.
SR3H3 flat at 95.0575, M3 -3bps at 94.865, U3 -3.5bps at 95.115, Z3 -6bps at 95.52, H4 -9.5bps at 96.02, M4 -11.5bps at 96.465, U4 -10.5bps at 96.79, Z4 -9bps at 96.99, H5 -8bps at 97.09, H6 -6bps at 97.10.
Volumes fall from USD 1.497tln to USD 1.466tln, and SOFR drops to 5.05%.
Demand for NY Fed RRP Ops at USD 2,214tln. (prev. Demand for NY Fed RRP op at USD 2.214tln (prev. 101)
Volumes fall from 126bln USD to USD 124bln.
US sold USD 39bln in 17-week bills, at 5.100%. Covered 2.57x.
WTI (M3) SETTLED 1.97 USD HIGHER, AT 72.83/BBL. BRENT N3 SETTLED 2.05 USD HIGHER, AT 76.96/BBL
The crude complex firmed up on Wednesday, and it appeared that this was a result of heightened risk-on sentiment rather than a crude-specific catalyst. However, some desks pointed to potential optimism regarding debt ceiling negotiations.
WTI and Brent both saw a gradual rise through the European morning. However, this was accentuated by the cash opening throughout the US session, reaching highs of 73.26/bbl & 77.31/bbl respectively, from lows 70.04 & 74.10. The EIA data showed an unexpected increase of 5.040mln (exp.) in crude oil on the day. The EIA report showed a smaller build than the surprise build in private inventory metrics on Tuesday night. 0.3%, exp. According to the Iranian Press Tasnim, Iran's oil minister noted that the market was on track after recent OPEC+ decision. Looking ahead, from a macro perspective the themes of recession fears, debt ceiling discussions, and demand woes remain important, in addition to a Fed speech (specifically Powell on Friday), Philly Fed earnings and Walmart earnings on Thursday, and Japanese CPI on Friday.
According to the Iranian Press Tasnim, Russia has agreed to invest into six Iranian oilfields. Novak, the Deputy Prime Minister of Russia, said that oil product swaps between Iran and Russia could total up to 4-5 million tonnes per year. Novak said that Russia had achieved oil production reductions of 500k BPD by May, and the global market was balanced. They said in March that they would continue their voluntary production cut of 500k BPD up until the end of 2023. This is a reduction from the average February production level.
: SPX +1.19% at 4,159, NDX +1.22% at 13,589, DJI +1.24% at 33,420, RUT +2.21% at 1,774.
Communications Svs. +1.18% Materials +0.67% Health Care +0.1% Consumer Staples +0.1% Utilities +0.36%
: Euro Stoxx 50 +0.18% at 4,323, FTSE 100 -0.36% at 7,723, DAX 40 +0.34% at 15,951, CAC 40 -0.09% at 7,399, FTSE MIB -0.01% at 27,196, IBEX 35 +0.22% at 9,211, SMI -0.67% at 11,442.
Western Alliance (WAL),
After reporting QTD deposits growth of over USD 2bln as of May 12, the KRE ETF and other regional banks surged. Deposit balances were stabilised on March 20th, and growth resumed. The bank said that the Insured Deposit strength was higher than 79% on May 12th compared to 68% at March 31st.
The company beat both the top line and bottom line but reduced its Q2 profit forecast while reaffirming its FY guidance. TGT's sales have slowed down in March, and will continue to do so in April.
TJX Companies (TJX)
Profits were better than expected, but revenue was below expectations. The Q2 outlook was not as positive in the guidance but did raise the FY outlook - albeit less than expected. TGT, TJX and other retailers closed the day in the black despite the soft guidance given by both companies. This was because the results were not as bad after Home Depot on Tuesday.
Keysight Technologies (KEYS)
The Q3 profit forecast was also raised as the company exceeded Wall Street's expectations.
The top-line and bottom-line results exceeded analyst expectations, but revenue guidance for Q1 and FY24 disappointed.
Barclays upgraded the rating citing Wynn Macao's continued recovery. CNBC's Faber stated
The FTC believes that they can win their case in court and beat them regarding the purchase of
Horizon Therapeutics HZNP
Bloomberg reports that is likely to be hit with a record fine for transatlantic transfers.
The CFO stated that the company is on track to save USD 2.5bln or more in SG&A, and Disney+ breakeven was firmly within their sights.
The Class A common shares were sold for USD 125mln.
Musk said that the macro-economic conditions would remain difficult for atleast a year. He is still confident, however, that Tesla will be able to navigate these uncertainties. Musk stated that he did not plan to step down as Tesla's CEO. He also said he hoped to finish the design of the next-generation Roadster this year. Musk also said that the automaker might consider advertising. Separately Tesla is also in discussions with Indian government officials about setting up an EV manufacturing facility. According to InsideEVs, Tesla filed paperwork to expand its EV plant in China. The factory is called Giga Shanghai.
US FX WRAP
The Dollar was still bid on Wednesday despite risky trading conditions. However, this limited the Dollar's gains. Meanwhile, the rise in UST rates was limiting a further decline. The DXY reached a high of 103.12, before dipping below 103.50 and remaining in the 103.50 range throughout the rest of the session. The Fed did not speak, but the data was mixed. Building permits fell 1.5% from 1.437mln to 1.416mln despite expectations of a flat print. Housing starts increased from the previous revised 1.371mln figures to 1.401mln. This was more or less in line expectations.
The Dollar's strength has caused the EUR/USD to lose 1.0850, from a peak of 1.0873. The final EZ HICP data was largely unchanged and in line expectations. In ECB talk, de Cos noted that the ECB's cycle is nearing its end. De Guindos stated tightening has been mostly completed but there is still a long way to go. The EUR/GBP fell on the hope that the EU would spare the UK from car tariffs, after reports indicated productive talks and automaker groups requested this. The single currency was also likely affected by the softening of China's data and growth expectations.
The currency has weakened beyond the crucial 7,0000 figure against the Dollar for first time since December'22. The fix as expected only encouraged the sellers. The PBoC’s attempts to offset the weakness through rate differentials by issuing CNY25bln of bills in Hong Kong did not stop the currency’s selling momentum. Slowing home price increases on Wednesday added to the weak IP data of Tuesday. Some Sell Side strategists have also cut their GDP forecasts for 2023, including JPM (5.9%, down from 6.4%), and Barclays (5.3%, down from 5.6%).
. and other traditional safe havens, (XAU, CHF) were weaker compared to the Dollar due to the high risk appetite. US equities surged on hopes of a debt ceiling, while some retail earnings weren't as bad as Home Depot had portrayed them on Tuesday. Regional banks also surged after the positive update from WAL. This adds to the hope that the fin stability woes are easing since the collapse of SVB Signature and First Republic. The Yen's GDP was higher than analyst expectations, coming in at 0.4% on a quarterly basis and 1.6% on an annualized basis. However, this had little effect on the pair, which rose from 137.08 at the 200dma to 137.63 at the US session. The Yen was primarily driven by the move in US yields, and the rampant increase in equities. This also drove the gold price lower.
Risk recovered, but the results were mixed. ANZ raised its terminal rate forecasts for the RBNZ from 5.75% to 5.75% in July. It also expects a 25bp increase in June, but has a 20% chance of a 50%bp rise. AUD saw only marginal gains against the dollar, while GBP remained flat despite the risky environment. However, GBP strengthened versus the Euro. The Aussie's gains were also limited by the lower-than-expected wage index for Q1. CAD gained some ground against the dollar, with USD/CAD dropping below 1.35 and c. 1.3450. This was supported by a rise in crude oil prices.
Mixed. It was mixed.
BRL showed marginal gains, despite the slowing of inflation data that seemed to track the risk tone. The Brazilian IGP10 index of inflation slowed from -0.58% to -1.53 % in May. This is lower than expected at -1.53%, which will only reinforce the calls for BCB to reduce rates. Finance Minister Haddad reiterated this today. COP and CLP were the best performers in LatAm forex due to the gains in crude oil and copper, while MXN lagged behind ahead of Thursday's Banxico rate announcement.
Other parts of EM
The ZAR was weaker than expected after retail sales fell 1.6% from February to March, and analysts had predicted a -0.7%. Note that the previous was revised from -0.5%. The latest SARB Rate Decision Poll by Reuters revealed that analysts expect a 25bp increase on May 25th, before pausing and rate cuts in Q1 & Q3 2024. The TRY fell due to the continued decline in local bank shares on uncertainty surrounding the May 28th run-off election.