Mid-Market Update: Fitch puts US AAA rating on negative watch; Germany enters a technical recession; US debt limit talks inconclusive; NVDA earnings overwhelmed by wave of negative sentiment.

Notes/observations

- Risk aversion and safe haven flows continue as debt ceiling concerns amplify. Fitch put US AAA sovereign rating on negative watch, warns minting a trillion-dollar coin or 14th amendment enforcement will not change their concerns. Latest from House Speaker McCarthy is that negotiations are better than before but a number of issues remain.

- Germany enters technical recession with Q1 final GDP revision to -0.5% YoY. German GFK confidence missed and remained weak. In the UK, some positive news for inflation as energy regulator Ofgem cuts energy price cap by 37%, marking the 2nd consecutive cut.

- On central banks, Indonesia leaves rates unchanged, as expected. Overnight Bank of Korea also left rates unchanged and Fed's Bostic with hawkish comments that the Fed will not mull rate cuts until 2024.

-Asia closed lower with Hang Seng under-performing at -1.9%. EU indices are -0.3% to +0.3%. US futures are -0.2% to +1.7% (Nasdaq +1.7%). Gold +0.2%, DXY +0.2%; Commodity: Brent -1.1%, WTI -1.3%, TTF -4.1%; Crypto: BTC -2.0%, ETH -1.7%.

Asia

- Bank of Korea (BOK) left the 7-Day Repo Rate unchanged at 3.50% (as expected) for its 3rd straight pause in the current tightening cycle. Reiterated stance to keep restrictive policy stance for considerable time.

- BOK Gov Rhee post-rate decision press conference noted that the decision to keep policy steady was unanimous. All 6 members "opened" to a 3.75% as terminal rate (**Note: implies one more 25bps hike). Stressed that market should not think BOK would not hike rates again; to be data-dependent.

- BOK Staff Projections cut the 2023 and 2024 GDP growth forecasts. It maintained the 2023 CPI forecast at 3.5%.

- New Zealand RBNZ Gov Orr: Rates are restrictive, well above neutral.

- China Securities Daily noted that no room for further sharp depreciation of the China Yuan (CNY). It was unlikely that market would form a consistent bearish expectation on the yuan.

- Singapore Central Bank (MAS) reiterated that current policy stance was appropriate, to assess again in October.

Europe

- ECB's Vasle (Slovenia) reiterated stance that ECB must still raise interest rates further.

Debt Ceiling talks:

- Fitch placed the United States 'AAA' sovereign rating on ‘watch negative citing the debt ceiling brinkmanship". It stressed that avoiding default by non-conventional means such as minting a trillion-dollar coin or invoking the 14th amendment was unlikely to be consistent with the 'AAA' rating and could also be subject to legal challenges.

- White House responded to the Fitch report and noted that it showed more evidence that a default was not an option, reinforced the need for US Congress to quickly pass bipartisan agreement to avoid debt default situation.

- Treasury responded to the Fitch report and stressed that it showed the swift need for bipartisan action to avoid a manufactured crisis of the US economy.

- The aftermath of the Fitch rating warning saw the yield on Treasury Bill maturing Jun 1st rising almost 20bps toward 7.50%.

- US House Speaker McCarthy noted that things were better than they were compared to Tuesday (May 23rd); Did not have a set time to meet with President Biden; Negotiations had made some progress, but a number of issues remained unresolved. Still believed that had time to get an agreement done.

Americas

- FOMC May Minutes showed that Fed Officials were divided over any potential June rate pause. Some believed that if economy evolved along expectations then additional policy tightening would likely be warranted. Other member disagreed and saw reasons for potential pause. Officials saw rising downside growth risks on credit.

- Florida Gov DeSantis officially announced his candidacy for the Republican Presidential nomination on Twitter (as expected).

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.25% at 456.50, FTSE -0.19% at 7,612.70, DAX -0.18% at 15,813.35, CAC-40 -0.08% at 7,247.72, IBEX-35 +0.13% at 9,175.55, FTSE MIB -0.23% at 26,464.00, SMI -0.15% at 11,366.30, S&P 500 Futures +0.64%].

Market Focal Points/Key Themes: European indices open with a bias to the downside and traded mixed after the first hours of the session; leading sectors to the upside include technology and financials; while consumer discretionary and materials sectors led to the downside; chip stocks rising following Nvidia results; earnings expected in the upcoming US session include Medtronic, Best Buy and Ralph Lauren.

Equities

- Consumer discretionary: Suedzucker [SZU.DE] -4.5% (final earnings).

- Consumer staples: Tate & Lyle [TATE.UK] -1.5% (FY23 results, initial FY24 guidance).

- Materials: Johnson Matthey [JMAT.UK] -3.5% (earnings).

- Financials: Generali [G.IT] -1.0% (earnings).

-Industrials: Qinetiq [QQ.UK] +1.0% (FY23 results, provides FY24 targets).

- Healthcare: Transgene [TNG.FR] +5.5% (Positive Phase 1a data on Oncolytic virus BT-001 in solid tumors).

- Utilities: United Utilities [UU.UK] +1.0% (earnings; UK Ofgem cuts energy price cap).

- Technology: ASML Holding [ASML.NL] +5.5%, ASM International [ASM.NL] +7.5%, STMicroelectronics [STM.FR] +1.0%, Infineon [IFX.DE] -1.0% (NVDA results sector related), Soitec [SOI.FR] +0.5% (analyst action - initiated at overweight at Morgan Stanley).

- Telecom: Ericsson [ERIC.SE] +0.5% (US District Court dismisses 'in full' securities claim against Ericsson).

Speakers

- ECB’s de Guindos (Spain) stated that wages, profits pose upside risks to inflation. Banking sector crisis poses a downside risks to inflation.

- UK Energy Regulator OFGEM cut the energy price cap by 37% (from £3,280 to £2,074); effective July 1st.

- Swiss Finance Ministry stated that the govt to start consultation on liquidity backstop for all systemically important banks.

- Poland Central Bank (NBP) Member Dabrowski noted that could be space for a rate cut at the end of the year when CPI might be between 5-7%.

- Czech PM Fiala stated that both the Govt and Central Bank had a common goal to control inflation and.

- Russia Dep PM Novak stated that he did not see new steps at the June 4th OPEC+ meeting (**Reminder: On Apr 3rd OPEC+ confirmed total voluntary production cuts amount of 1.66M bpd from May to end-2023).

- Japan Cabinet Office (Govt) May Monthly Report raised its overall economic assessment for the 1st time since July 2022. It now saw the economy recovering moderately (**Note: prior view was domestic economy was recovering modestly but some weakness was seen recently).

- Indonesia Central Bank Policy Statement noted that its decision to keep policy steady was consistent with stance to ensure core inflation remained within target. Focus to be on IDR currency (Rupiah) stability to manage imported inflation. Policy mix to be directed to support sustainable economic growth.

- Indonesia Central Bank (BI) Gov Warjiyo pre-rate decision press conference noted that headline CPI to return to target in Q3 while core inflation seen staying within target. IDR currency (rupiah) remained stable and in line with fundamentals. hWould continue to stabilize IDR currency (rupiah) with twist operation and intervention.

Currencies/fixed income

- USD continued to be on firm footing following the FOMC May Minutes and continuing US debt ceiling negotiations. Dealers noted of speculation that even if the Fed did pause in June, it would still raise rates in July. The Fitch warning shot on the US sovereign rating provided some additional safe-haven flows. The USD curiously benefited safe haven demand with only a week left for a resolution to debt ceiling talks before the June 1st "X-date".

- USD/JPY probing the 140 neighborhood as higher Treasury yields aided the USD.

- EUR/USD at 1.0730 as Germany was confirmed to be in a technical recession.

- GBP/USD at 1.2365. Pair moved off its worst level as market now see an additional 100bps of rate hike by the end of 2023.

Economic data

- (DE) Germany Q1 Final GDP Q/Q: -0.3% v 0.0% prelim (enters into a technical recession); Y/Y: -0.5% v -0.1% prelim; GDP NSA (unadj) Y/Y: -0.2% v +0.2% prelim.

- (DE) Germany Q1 Private Consumption Q/Q: -1.2% v -0.7%e; Government Spending Q/Q: -4.9% v -0.4%e; Capital Investment Q/Q: 3.0% v 1.9%e.

- (DE) Germany June GFK Consumer Confidence: -24.2 v -24.0e.

- (SE) Sweden Apr Unemployment Rate: 7.5% v 7.7% prior; Unemployment Rate (seasonally adj): 7.1% v 7.3%e; Trend Unemployment Rate: 7.2% v 7.3% prior.

- (NO) Norway Apr Credit Indicator Growth Y/Y: 5.3% v 5.2% prior.

- (NO) Norway Apr Trend Unemployment Rate: 3.5% v 3.5% prior.

- (FR) France May Business Confidence: 100 v 101e; Manufacturing Confidence: 99 v 101e; Production Outlook Indicator: -10 v -5e; Own-Company Production Outlook: 4 v 5 prior.

- (ES) Spain Apr PPI M/M: -2.0% v -2.5% prior; Y/Y: -4.5% v -1.4% prior.

- (ID) Indonesia Central Bank (BI) left the 7-day Reverse Repo Rate unchanged at 5.75% (as expected).

- (PL) Poland Apr Unemployment Rate:5.2 % v 5.3%e; Q1 Unemployment Rate: 2.9% v 3.0%e.

- (FR) France Apr Retail Sales Y/Y: -6.8% v -5.6% prior.

Fixed income issuance

- (IT) Italy Debt Agency (Tesoro) sold total €2.75B vs. €2.25-2.75B indicated range in 3.40% Mar 2025 BTP bonds; Avg Yield: 3.61% v 3.58% prior; bid-to-cover: 2.55x v 1.52x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (ZA) South Africa Apr PPI M/M: No est v 1.0% prior; Y/Y: No est v 10.6% prior.

- 05:30 (PL) Poland to sell 2025, 2028, 2033 Bonds (4 tranches).

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-month Bills.

- 05:40 (SE) Sweden Central Bank (Riksbank) Gov Thedeen.

- 06:00 (UK) May CBI Retailing Reported Sales: 10e v 5 prior; Total Distribution Reported Sales: No est v 11 prior.

- 06:00 (CZ) Czech Republic to sell 3-month Bills.

- 06:00 (RO) Romania to sell RON300M in 7.9% 2038 Bonds.

- 06:30 (DE) ECB’s Nagel (Germany).

- 06:45 (US) Daily Libor Fixing.

- 07:00 (TR) Turkey Central Bank (CBRT) Interest Rate Decision: Expected to leave One-Week Repo Rate unchanged at 8.50%.

- 07:00 (CA) Canada May CFIB Business Barometer: No est v 55.7 prior.

- 07:00 (BR) Brazil May FGV Consumer Confidence: No est v 86.8 prior.

- 07:15 (FR) ECB’s Villeroy (France).

- 08:00 (MX) Mexico Apr Trade Balance: -$1.4Be v +$1.2B prior.

- 08:00 (BR) Brazil mid-May IBGE Inflation IPCA-15 M/M: -0.6%e v 0.6% prior; Y/Y: 4.2%e v 4.2% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (US) Q1 Preliminary GDP Annualized (2nd of 3 readings) Q/Q: 1.1%e v 1.1% prior; Personal Consumption: 3.7%e v 3.7% prior.

- 08:30 (US) Q1 Preliminary GDP Price Index (2nd of 3 readings): 4.0%e v 4.0% prior; Core PCE Q/Q: 4.9%e v 4.9% prior.

- 08:30 (US) Initial Jobless Claims: 245Ke v 242K prior; Continuing Claims: 1.80Me v 1.799M prior.

- 08:30 (US) Apr Chicago Fed National Activity Index: -0.20e v -0.19 prior.

- 08:30 (US) Weekly USDA Net Export Sales.

- 09:00 (RU) Russia Gold and Forex Reserve w/e May 19th: No est v $599.5B prior.

- 09:00 (ZA) South Africa Central Bank (SARB) Interest Rate Decision: Expected to raise Interest Rates by 50bps to 8.25%.

- 09:30 (PT) ECB’s Centeno (Portugal).

- 10:00 (US) Apr Pending Home Sales M/M: +1.0%e v -5.2% prior; Y/Y: -20.3%e v -23.3% prior.

- 10:30 (US) Weekly EIA Natural Gas Inventories.

- 11:00 (MX) Mexico Q1 Current Account: No est v $4.6B prior.

- 11:00 (US) May Kansas City Fed Manufacturing Activity Index: -12e v -10 prior.

- 11:30 (US) Treasury to sell 4-Week and 8-Week Bills.

- 12:30 (UK) BOE’s Haskel.

- 13:00 (US) Treasury to sell 7-year notes.

- 18:00 (NZ) New Zealand May Consumer Confidence: No est v 79.3 prior.

- 19:30 (JP) Japan May Tokyo CPI Y/Y: 3.4%e v 3.5% prior; CPI (ex-fresh food) Y/Y: 3.4%e v 3.5% prior; CPI (ex-fresh food/energy) Y/Y: 3.9%e v 3.8% prior.

- 19:50 (JP) Japan Apr PPI Services Y/Y: 1.4%e v 1.6% prior.

- 21:30 (AU) Australia Apr Retail Sales M/M: 0.3%e v 0.4% prior.

- 22:35 (CN China Plans to s 3-month bills.

- 23:30 (JP) Japan to sell 3-Month Bills.

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