Rating agencies put pressure on US debt limit negotiations as long weekend approaches

EU mid-market update: Rating agencies put pressure on US debt limit negotiations as long weekend approaches; AI semiconductor sector maintains momentum.

Notes/observations

- Latest on US debt ceiling, McCarthy stated there is no agreement, but will continue to work through this weekend (Mon is US Memorial Day), current talks said to focus on raising the debt limit for 2 years.

- On watch for potential US sovereign rating downgrades over coming days after China's top rating agency Chengxin downgrades US to 'AA+' from 'AAA', just one day after Fitch puts US on negative watch and Canada's DBRS Morningstar puts US under review.

- Generally light session for EU news as long weekend approaches for several European markets.

- AI/semiconductor sector continues to outperform with additional tailwinds from MRVL earnings.

- GBP/USD (cable) higher on back of better-than-expected UK Apr retail sales and broad dollar weakness overnight.

- Asia closed higher with India’s Nifty50 outperforming, currently +1.0%. EU indices are -0.7% to +0.1%. US futures are flat to mixed. Gold +0.6%, DXY -0.2%; Commodity: Brent 0.0%, WTI +0.1%, TTF +0.4%; Crypto: BTC +0.7%, ETH +1.5%.

Asia

- Japan May Tokyo CPI Y/Y: 3.2% v 3.4%e; CPI (ex-fresh food) Y/Y: 3.2% v 3.4%e.

- Japan Apr PPI Services Y/Y: 1.6% v 1.4%e v 1.6% prior.

- Australia Apr Retail Sales M/M: 0.0% v 0.3%e.

- Japan BOJ Gov Ueda testified that could tweak YCC if benefit/cost balance shifted. Shortening the duration of bond yield BOJ targets to 5-year zone from current 10-year would be among options.

- RBNZ Assistant Gov Silk noted that was watching if markets priced rate cuts too soon; rates needed to remain on hold for extended.

- China major state-owned banks seen selling US dollars in onshore spot FX market, notes USD/CNH was near 7.10 [amid Hong Kong holiday.

- Japan Fin Min Suzuki reiterated stance that FX should reflect fundamentals; Would closely watch FX movement.

Europe

- ECB’s Knot (Netherlands) stated that saw no sign that underlying inflation was abating. Needed at least two more rate hikes (Jun and July), of 25bps after that we should stay put for a significant amount of time. Was open minded on what happened with rates after the summer.

- BOE's Haskel: Higher business profits not driving inflation, prefer to lean against risks of inflation momentum.

Debt ceiling talks

- President Biden and House Speaker McCarthy said to be closing in on a deal that would raise the government's $31.4T debt ceiling for two years while capping spending on most items. The two side are just $70B apart on discretionary spending.

- House Republicans said to feel 'very good' about a deal to lift the debt limit and expect the compromise would come together sometime in the next few days, but 'very possible' the debt limit would not be lifted until June 3rd-4th.

- TD Bank analyst: Treasury’s cash said to be under $50B.

- Moody's US must make its mid-June interest payment to avoid downgrade, (**Note: US has approx $2B in interest payments due on Jun 15th.

- China Chengxin (China top rating agency) cut United States sovereign credit rating from 'AAA' to 'AA+' (one notch); placed on watch negative [**Note: 1st rating agency worldwide to downgrade US credit rating during current debt limit talks).

Ukraine

- Russia Dep Chair of Security Council Medvedev (former Pres) said there will be no negotiations with Ukraine while Zelenskiy is in power; Ukraine conflict is for a very long time. It’s all for decades, probably; There will be, say, three years of cease-fire, two years of conflict, and then everything will happen again.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.26% at 457,37, FTSE +0.03% at 7,573.15, DAX -0.06% at 15,784.05, CAC-40 +0.02% at 7,230.93, IBEX-35 -0.35% at 9,083.84, FTSE MIB -0.50% at 26,276.00, SMI +0.08% at 11,333.80, S&P 500 Futures -0.07%].

Market focal points/key themes: European indices open generally higher but later turned around to trade lower; sectors leaning into the green include technology and industrials; among sectors trending lower are real estate and consumer discretionary; tech supported by continuation of positive drive from Nvidia’s results on Wednesday; focus on release of EMA’s CHMP decisions; earnings expecting in the upcoming US session include Booz Allen Hamilton and Big Lots.

Equities

- Consumer discretionary: Kin and Carta [KCT.UK] -6.0% (trading update; cuts outlook; notes market is even more cautious than we expected as there remains hesitance among enterprise clients), Asos [ASC.UK] -1.5% (placement), Prosieben [PSM.DE] -1.0% (Q1 results, misses estimates, guides Q2, affirms FY23), Coca-Cola Hellenic Bottling Co [EEE.GR] +3.0% (investor day - raised medium term targets).

- Consumer staples: Casino Guichard-Perrachon {CO.FR] -5.5% (divests stores; sells minority stake).

- Materials: Pan African Resources [PAF.UK] -22% (cuts FY23 gold production).

- Financials: Uniqa [UQA.AT] -1.0% (Q1 results), Immofinanz [IMFI.AT] -0.5% (Q1 results).

- Healthcare: AstraZeneca [AZN.UK] +1.0% (Imfinzi plus Lynparza and Imfinzi alone both significantly improved progression-free survival).

- Industrials: Faurecia [EO.FR] +4.5% (analyst action - raised to Buy at Jefferies).

- Telecom: Tele2 [TEL2A.SE] -1.0% (analyst action - raised to Buy at CitiGroup).

Speakers

- ECB's Lane (Ireland, chief economist) stated that inflation would return to target in a timely manner. Economic growth will be subdued in 2023.

- ECB’s Vujcic (Croatia) noted that inflation momentum remained persistent and questionable whether the 2% target was achievable in the next two years.

- Sweden Central Bank (Riksbank) 1st Dep Gov Breman noted that it was not good that SEK currency (Crown) remained weak. Could increase bond sales if currency contined to weaken.

- Poland Central Bank (NBP) Gov Glapinski noted that domestic inflation to ease significantly by year-end. Believed that slower economic growth would help lower inflation.

- Poland PM Morawiecki reiterated hope for possible interest rate cuts in Q4.

- Hungary Central Bank Dep Gov Virag: Target a positive real rate by end 2023.

Currencies/fixed income

- USD was steady in quiet trading on Friday and on track to register its 3rd week of gains. Greenback has been aided by revised expectations of just how much further rates could rise in the US.

- USD/JPY tested the 140 level for 6-month highs during the Asian session. Japan Fin Min Suzuki reiterated stance that FX should reflect fundamentals and would closely watch FX movements.

- EUR/USD steady around 1.0730 as various ECB members continue to note the need for more rate hikes to combat inflation.

- GBP/USD getting some small tailwinds on BOE rate path expectations. Markets still see another 100bps in hikes by the end of 2023. Pair at 1.2355 by mid-session.

Economic data

- (UK) Apr Retail Sales (ex-auto/fuel) M/M: 0.8% v 0.4%e; Y/Y: -2.6% v -2.8%e.

- (UK) Apr Retail Sales (including auto/fuel) M/M: 0.5% v 0.3%e; Y/Y: -3.0% v -2.8%e.

- (SE) Sweden Apr Retail Sales M/M: +2.8% v -1.5% prior; Y/Y: -6.5% v -10.8% prior.

- (SE) Sweden Apr PPI M/M: -1.0% v -0.1% prior; Y/Y: 1.3% v 3.5% prior.

- (NO) Norway Apr Retail Sales M/M: -1.2% v -0.2% prior.

- (HU) Hungary Apr Unemployment Rate: 3.9% v 4.1%e.

- (FR) France May Consumer Confidence: 83 v 84e.

- (ES) Spain Mar Total Mortgage Lending Y/Y: -11.5% v -1.9% prior; Mortgage Approvals Y/Y: -15.7% v -2.0% prior.

- (CN) Weekly Shanghai copper inventories (SHFE): 86.2K v 102.5K tons prior.

- (TW) Taiwan Q1 Final GDP Y/Y: -2.9% v -3.0% prelim.

- (TW) Taiwan Apr Monitoring Indicator: 11 v 11 prior.

- (IT) Italy May Consumer Confidence: 105.1 v 105.0e; Manufacturing Confidence: 101.4 v 102.5e; Economic Sentiment: 108.7 v 110.4 prior.

- (RU) Russia Narrow Money Supply w/e May 19th (RUB): 17.59T v 17.52T prior.

- (TR) Turkey Apr Foreign Tourist Arrivals Y/Y: 29.0% v 12.3% prior.

- (IS) Iceland May CPI M/M: 0.4% v 1.3% prior; Y/Y: 9.5% v 9.9% prior.

Fixed income issuance

- (IN) India sold total INR310B vs. INR310B indicated in 2030, 2036 and 2062 bonds.

- (IT) Italy Debt Agency (Tesoro) sold €6.0B vs. €6.0B indicated in 6-month Bills; Avg Yield: 3.528% v 3.329% prior; Bid-to-cover: 1.45x v 1.51x prior.

Looking ahead

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

- 05:30 (ZA) South Africa to sell combined ZAR1.0B in I/L 2031, 2036 and 2046 Bonds.

- 06:00 (UK) DMO to sell £4.5B in 1-month, 3-month and 6-month bills (£0B, £B and £B respectively).

- 06:45 (US) Daily Libor Fixing.

- 07:00 (BR) Brazil May FGV Construction Costs M/M: 0.3%e v 0.2% prior.

- 07:30 (IN) India Weekly Forex Reserve w/e May 19th: No est v $599.5B prior.

- 07:30 (BR) Brazil Apr Current Account Balance: -$0.2Be v +$0.3B prior; Foreign Direct Investment (FDI): $4.8Be v $7.7B prior.

- 07:30 (IN) India announces upcoming bill issuance (held on Wed).

- 08:00 (MX) Mexico Q1 Final GDP Q/Q: 1.0%e v 1.1% prelim; Y/Y: 3.8%e v 3.9% prelim; Nominal GDP Y/Y: No est v 10.3% prior.

- 08:00 (MX) Mexico Mar IGAE Economic Activity (Monthly GDP) M/M: -0.1%e v +0.1% prior; Y/Y: 3.2%e v 3.8% prior.

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

- 08:30 (US) Apr Personal Income: 0.4%e v 0.3% prior; Personal Spending 0.5%e v 0.0% prior; Real Personal Spending (PCE): 0.3%e v 0.0% prior.

- 08:30 (US) Apr PCE Deflator M/M: 0.3%e v 0.1% prior; Y/Y: 4.3%e v 4.2% prior.

- 08:30 (US) Apr PCE Core M/M: 0.3%e v 0.3% prior; Y/Y: 4.6%e v 4.6% prior.

- 08:30 (US) Apr Advance Goods Trade Balance: -$85.9Be v -$84.6B prior.

- 08:30 (US) Apr Preliminary Wholesale Inventories M/M: 0.0%e v 0.0% prior; Retail Inventories M/M: 0.2%e v 0.7% prior.

- 08:30 (US) Apr Preliminary Durable Goods Orders: -1.0%e v +3.2% prior; Durables (ex-transportation): -0.1%e v +0.2% prior; Capital Goods Orders (non-defense/ex-aircraft): -0.1%e v -0.6% prior; Capital Goods Shipments (non-defense/ex-aircraft): +0.1%e v -0.5% prior.

- 10:00 (US) May Final University of Michigan Confidence: 58.0e v 57.7 prelim.

- 11:00 (US) May Kansas City Fed Services Activity: No est v 7 prior.

- 11:00 (EU) Potential sovereign ratings after European close.

- 11:00 (US) Fed's Mester on CNBC.

- 13:00 (US) Weekly Baker Hughes Rig Count.

- 21:30 (CN) China Apr YTD Industrial Profits Y/Y: No est v -21.4% prior.