Futures Drop After China Dismal Data Dump, Debt Ceiling Debate Enters Crunchtime

US equity futures dropped on Tuesday ahead of today's critical debt ceiling discussions in Washington and weighed expectations of more easing after China’s data showed the recovery there is rapidly losing momentum. Both S&P 500 and Nasdaq futures down -0.1% at 7:45am ET, but off the best and worst levels of the session. Treasuries are up ahead of the debt-ceiling talks with the Bloomberg dollar index slightly weaker, while oil is extending yesterday’s gains. Iron ore is up this morning, while gold is lower.

“Markets are still absorbing some of this morning’s earnings reports, but today’s China data was a little disappointing which is prompting some weakness in luxury retail and basic resources,” said Michael Hewson, chief market analyst at CMC Markets UK.

In premarket trading, Home Depot dropped as much as 5.5% market after cutting its full-year guidance and reporting comp sales that missed the average analyst estimate. The company blamed softening consumer demand, lumber deflation and unfavorable weather, particularly in California, for the sales shortfall. Home-improvement retailer peer Lowe’s, which reports results May 23, fell in sympathy. Shares of RH fell 4% after Berkshire exited its position in the home furnishing company. On the other end, Capital One rose as much as 6.7% in premarket trading as Berkshire Hathaway's 13F showed the conglomerate added the stock to its portfolio in the first quarter. Here are some other premarket movers:

Horizon Therapeutics plunges 18% in US premarket trading Tuesday on a report that federal regulators are preparing a lawsuit to block the company’s sale to biotech firm Amgen.
Nubank shares rise as much as 8.4% in US premarket trading, set to hit their highest level in over one year, after the Brazilian digital bank reported total revenue for the first quarter that beat the average analyst estimate. Citi said the company’s surge in profitability was “impressive.”
Gilead Sciences shares rise 1.1% in premarket trading, after BMO Capital Markets upgrades the biopharmaceutical company to outperform from market perform, noting the “best-in-class” cell therapy franchise.
First Watch Restaurant Group declined 5.5% in postmarket after funds managed by Advent International offered 3.5 million shares via Jefferies.
Reservoir Media shares rose 2.6% in postmarket trading after Elliott Investment Management reported holding 401,546 shares valued at $2.62 million in the first quarter.
Rumble dropped 3% in postmarket trading after the video-platform company saw quarterly losses balloon as it expanded its roster of influencers and personalities.
Ducommun declined 11% in postmarket trading after offering 2m shares via Goldman Sachs, Citigroup, RBC Capital Markets, B. Riley Securities.
Beam Global shares soared 16% in postmarket trading after reporting revenue for the first quarter that beat the average analyst estimate.

The rally in US stocks has stalled in May, as investors fret over sticky inflation and the impact on growth from higher-for-longer interest rates. Continuing negotiations over the debt ceiling are also putting a lid on risk appetite, with Treasury Secretary Janet Yellen warning again that the US is already paying a price for its failure to raise the federal debt limit.

Two Federal Reserve officials this week signaled they favored pausing interest-rate increases, while a third policymaker said the central bank’s task in subduing inflation was not complete. “We do believe the Fed will pause for now, seeing how everything flows through the economy, but we still don’t believe the Fed will cut at the end of the year unless we have a severe recession or inflation back to 2%, which as you know is not our base-case scenario,” said Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, in a Bloomberg TV interview.

“Macro numbers are weakening but not falling off a cliff, so for now we still think yes there will be slowdown, but we are not seeing anything as harsh as some out there are expecting,” she said.

Sentiment among global fund managers in May deteriorated to the most bearish this year, with 65% of survey participants now expecting a weaker economy, Bank of America’s latest monthly Fund Manager Survey showed. At the same time, almost two thirds of investors see a soft landing as the most likely scenario for global economic growth and expect only a small contraction in earnings. Most surveyed fund managers expect the US debt ceiling to be raised by the so-called X-date.

“The debt ceiling should be really bad if we don’t get a solution, but also not supportive if we get a solution — a short-term relief due to over-hedging, but medium term a liquidity drag,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “When the debt ceiling is raised and the Treasury Department begins refilling its Treasury General Account with more bond issuance in the second half, then that would likely be very bad for liquidity, assuming the Fed is still doing QT at that point. That would be a negative double-whammy for liquidity.”

UBS Global Wealth Management strategists led by Mark Haefele said in a note that they see risk-reward for US equities as “unattractive” amid slowing economic growth and weakening consumption. In a soft landing scenario, the S&P 500 could rise to 4,400 by year-end, but if the economy slips into a recession, the market could fall to 3,300.

“We are all looking to Congress and the White House to see how the US debt ceiling discussions are moving ahead,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “Now that we have sufficient clarity on central bank policy and are close to the rate hike cycle peak, investors are looking for clarity on the political front before the coming earnings season.”

At the same time, traders have hedged worst-case scenarios by parking in cash, Treasuries and tech stocks, according to Bank of America Corp.’s latest survey. If the latest debt-ceiling episode plays out like 2011, Treasuries could be a big beneficiary in the run-up to the June 1 deadline.

Looking at today's main macro event, US retail sales may have bounced back in April, boosted by autos (see our preview here). Consensus sees a 0.8% gain after March’s revised 0.6% slump. But Bloomberg Economics said a shift in consumer demand from goods to services signals a rocky road ahead for retailers.

In Europe, stocks were off their worst levels but still nursing minor declines as the ongoing US debt-ceiling negotiations keep broader risk sentiment in check. The Stoxx 600 is down 0.1% with losses in autos and banks offsetting gains in utilities and tech. Technology shares were the biggest gainers. Telecom stocks dragged down the index, punctuated by a loss of as much as 5.4% in Telecom Italia SpA shares. Here are Europe's biggest movers:

Faurecia shares gain as much as 3.3% in Paris after Goldman Sachs initiated coverage with a buy rating, noting the automotive parts supplier is well positioned to benefit from a cyclical recovery
Boohoo rises as much as 17%, the most since Nov. 1, after the online fast-fashion retailer reported FY results, with Jefferies analysts noting the strong cash performance
Tech stocks rise, posting the biggest gain in the Stoxx Europe 600 Index, as bond yields drop, with semiconductor stocks such as ASM International and Infineon leading the sector’s advance
Land Securities gains as much as 2.7%, with analysts saying the UK landlord’s results show a good operational performance and an encouraging outlook for rental growth
Smiths Group advances as much as 2.5% as Bank of America double upgrades the industrial firm to buy from underperform, noting that hidden value in the stock can now be realized
InPost climbs as much as 4.2%, after the Polish parcel locker operator beat 1Q earnings estimates and guided for double-digit volume growth across all markets in 2Q
Philips gains as much as 6%, the most since April 24, after the Dutch medical technology group said new tests on its recalled breathing machines showed the majority are unlikely to cause harm
Embracer falls as much as 16% after the Swedish game developer cut its full-year profit view, with preliminary fourth-quarter figures missing estimates due to deal delays
Vodafone declines as much as 4.8%, their biggest intraday drop since November, after the telecom operator’s fiscal 2024 guidance for profits and free-cash flow missed expectations

Earlier in the session, Asian stocks rose as Japan’s Topix benchmark climbed to the highest in more than three decades, even as worse-than-estimated economic data from China dragged on its mainland-traded equities. The MSCI Asia Pacific Index gained as much as 0.6%, with technology names TSMC, Samsung Electronics and Tencent among the top contributors. Taiwan and Philippine markets were among the best performers. Chinese stocks fell in Shanghai and Shenzhen after official data showed industrial output, retail sales and fixed investment all missed estimates in April. Analysts forecast more policy support later this year.

Japan’s benchmark Topix has climbed 12% so far this year, beating the MSCI Asia Index’s 4.3% gain and a 7.7% advance in the S&P 500. The Topix has climbed to the highest since 1990. A renewed push by Japan’s corporates to increase buybacks and focus on returns is helping boost sentiment, with the Nikkei 225 Stock Average leading gains among Asia’s major benchmarks in 2023. A weakening yen and solid earnings are among factors that have boosted Japanese stocks, with Goldman Sachs among strategists seeing more gains to come. “The last 1-2 weeks were earnings peak season, and good results supported share prices,” said Rie Nishihara, chief Japan equity strategist at JPMorgan Chase & Co. “The announcement of share buybacks and dividend hikes by companies will end after May 15, so we think Nikkei will settle down before reaching 30,000 yen.”

“We believe Japanese stocks still have further to go,” Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, said on Bloomberg Television. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends.”

Indian stock markets were among the worst performers in Asia on Tuesday as shares of financial services and consumer companies extended declines into the end of the session. The selloff in local markets stood in contrast to gains from most Asian markets despite signs China’s economic recovery is losing momentum. The MSCI Asia-Pacific Index closed 0.4% higher. The S&P BSE Sensex fell 0.7% to 61,932.47 in Mumbai, while the NSE Nifty 50 Index declined 0.6% to 18,286.50. A sub-gauge of financial stocks fell 0.5% while BSE Consumer Discretionary index slid 0.4%. HDFC Bank contributed the most to the Sensex’s decline, decreasing 0.6%. Out of 30 shares in the Sensex index, 14 rose, while 16 fell.

Australian stocks feel: the S&P/ASX 200 index dropped 0.4% to close at 7,234.70 in broad declines, with consumer staples and tech sectors falling most. Australia’s consumer confidence tumbled in May after the Reserve Bank unexpectedly raised interest rates and the government handed down a budget that households found “mildly disappointing.” Read: Australia’s Consumer Confidence Slumps on Rate Hike and Budget In New Zealand, the S&P/NZX 50 index was little changed at 11,945.87.

In FX, the Bloomberg Dollar Spot Index is down 0.1%. The Swiss franc is the best performer among the G-10 currencies, rising 0.4% versus the greenback. The pound fell but losses were short-lived with cable since reclaiming the $1.25 handle and now trading higher on the day.

In rates, treasuries advanced across the curve with gains led by belly as 5s30s spread pushes to fresh session wides. Treasury yields richer by nearly 5bp across belly of the curve with 5s30s spread steeper by 2bp on the day; 10-year yields around 3.465% with gilts outperforming by additional 2.7bp in the sector. IG issuance slate includes Cades 5Y and JICA 5Y; 12 issuers priced almost $15b Monday; also, Pfizer mandated banks and announced investor outreach for what’s anticipated to be the financing component for its $43b Seagen acquisition. Bond sale could be in the $25b-$30b range as soon as Tuesday, according to Bloomberg. Gilts outperformed following an unexpected drop in UK payrolls data that prompted traders to pare bets for further BOE interest-rate hikes. Gilts are leading US and German counterparts higher after disappointing jobs data. UK two-year yields are down 8bps at 3.75% amid a slight dovish shift in market pricing for the Bank of England. In US session, focal points include retail sales data, several Fed speakers and potential announcement of a Pfizer jumbo bond offering.

In commodities, crude futures decline with WTI falling 0.5% to trade near $70.70. Spot gold falls 0.3% to around $2,010. Bitcoin drops 0.9%.

EU Council Finance ministers unanimously approved the Markets in Crypto Assets regulation (MiCA) and anti-money laundering rules "that could make it one of the first major jurisdictions to regulate the sector", according to CoinDesk; as expected.

Looking to the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for April, along with the NAHB housing market index for May. Elsewhere, we’ll get the German ZEW survey for May, Canadian CPI for April and UK unemployment for March. From central banks, we’ll hear from ECB President Lagarde and the ECB’s Makhlouf, along with the Fed’s Mester, Barr, Williams, Goolsbee, Logan and Bostic. Finally, today’s earnings releases include Home Depot.

Market Snapshot

S&P 500 futures little changed at 4,148.75
STOXX Europe 600 little changed at 466.61
MXAP up 0.4% to 162.45
MXAPJ up 0.2% to 515.39
Nikkei up 0.7% to 29,842.99
Topix up 0.6% to 2,127.18
Hang Seng Index little changed at 19,978.25
Shanghai Composite down 0.6% to 3,290.99
Sensex down 0.2% to 62,189.85
Australia S&P/ASX 200 down 0.4% to 7,234.69
Kospi little changed at 2,480.24
German 10Y yield little changed at 2.28%
Euro up 0.2% to $1.0894
Brent Futures up 0.3% to $75.48/bbl
Gold spot down 0.3% to $2,010.18
U.S. Dollar Index down 0.15% to 102.28

Top Overnight News

China’s April economic data disappoints, with industrial production rising 5.6% (up from +3.9% in March, but far below the consensus +10.9% forecast) while retail sales advance 18.4% (up from +10.6% in March, but below the Street’s +21.9% estimate), spurring calls for more policy support from the gov’t. BBG
Unemployment among China’s youth rose above 20 per cent for the first time in April, and the situation could continue to worsen, analysts said, presenting a growing economic and social risk for policymakers. The jobless rate for the 16-24 age group hit a record high of 20.4 per cent in April, up from 19.6 per cent in March, the National Bureau of Statistics (NBS) confirmed on Tuesday. SCMP
Oil demand growth estimate for this year raised by 200K BPD by the IEA due to increased China consumption. IEA
Ford will dial back its China investments amid questions about whether foreign firms can compete against domestic EV companies. FT
Russia hasn’t implemented its pledged crude-output cuts, with exports hitting a postwar high as Moscow seeks to boost energy revenue to fund military spending, according to the IEA. The Kremlin promised to cut production by 500,000 barrels a day in March and maintain the curbs for the rest of the year in retaliation for Western sanctions. BBG
Time is tight as Joe Biden meets with Kevin McCarthy at 3 p.m. to discuss the debt ceiling, a day before the president heads off on a foreign trip. Adding tension, progressives in the chamber warned they'll oppose any agreement adding more work requirements for food assistance to the poor. Janet Yellen reiterated time is running out and said "the impasse has already increased the debt burden to American taxpayers." BBG
Fed Vice Chair Barr repeats what other government officials (at the White House, Treasury and Fed) have said about the banking system – it’s “strong and resilient”, while “depositors should be confident that all deposits in our banking system are safe”. Fed
The mood among global fund managers soured further in May, with investors flocking to cash amid concerns that a recession and credit crunch are looming, according to Bank of America Corp.’s latest survey. The sentiment among fund managers deteriorated to the most bearish this year, with 65% of survey participants now expecting a weaker economy, BofA’s poll showed. BBG
Capitol Forum, an M&A journal, reported last night that the FTC will sue to block Amgen’s (AMGN) ~$30 billion acquisition of Horizon Therapeutics (HZNP). HZNP shares are trading -17% pre mkt. HZNP is the top owned situation in all of US merger arb right now. This news likely will cause de-risking across the broader merger arb landscape today. Capitol Forum / GS GBM

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mixed and only partially sustained the momentum from Wall St where stocks were led higher amid a short squeeze in US regional banks albeit with the upside capped by a disappointing NY Fed Manufacturing survey and debt ceiling concerns, while markets digested weaker-than-expected Chinese activity data. ASX 200 was lower as weakness in the tech and consumer sectors overshadowed the resilience in the commodity-related industries and with risk appetite also dampened by a deterioration in consumer confidence. Nikkei 225 strengthened as earnings results continued to take centre stage in Tokyo including Japan’s megabanks and after the TOPIX climbed to a fresh 33-year high. Hang Seng and Shanghai Comp. were varied with Hong Kong underpinned by strength in tech after it was reported that ‘Big Short’ investor Michael Burry boosted his bullish bets on e-commerce giants JD.com and Alibaba, while the mainland was choppy after disappointing activity data from China in which Industrial Production, Retail Sales and Fixed Assets Urban Investment all missed analysts’ forecasts.

Top Asian News

China NBS said the national economy sustained recovery momentum in April and that low price levels are temporary and will likely continue for some time, while it noted that low core CPI is due to service demand still being in recovery but added that consumer prices could gradually rebound in H2 as the economy recovers.
US senior administration official said the US expects a general agreement by the G7 on principles that define relationships with China and US expects leaders will make it clear they are unified behind a common approach grounded with common values on China. Furthermore, the official said there is a consensus among G7 countries on the need to ensure the security of technology and each G7 member will manage their own relationship with China but all are aligned around principles that guide relationships, according to Reuters.
Russia's PM is to lead a delegation to a business forum in China, according to the FT.
RBA May meeting minutes stated that the board considered pausing or hiking 25bps at the meeting and further increases in interest rates may still be required but would depend on how the economy and inflation evolve. RBA also stated that the central forecast is that inflation is not expected to reach the top of the target band until mid-2025 and it noted that risks include persistent services inflation and higher rent growth than anticipated.

European bourses are little changed but with a slight positive bias, Euro Stoxx 50 +0.1%, as macro drivers are limited and a downbeat/mixed ZEW only saw a modest trimming of initial performance. Sectors, are mixed with Tech and Utilities leading while Consumer Products/Services and Autos/Parts are the relative laggards. Stateside, futures were essentially unchanged ahead of numerous Fed speakers with broader attention on upcoming debt ceiling talks between President Biden & McCarthy with the ES just below 4150. However, the Q1 report from Home Depot (-4.0% pre-market) has resulted in some modest pressure, with US futures dipping into negative territory after the bellwether reports and misses on comp sales.

Top European News

German VCI Chemical Association: confirms 2023 guidance at 5% production decline (8% ex-pharma.).
Ukraine Raids Top Judge’s Home in Supreme Court Graft Probe
UK Labor Market Softens Even as Wages Continue to March Higher
Russia Hasn’t Made Its Pledged Crude-Output Cuts, the IEA Says

Dollar extends retreat ahead of the next debt ceiling meeting, as DXY fades from 102.570 to 102.190 and through the 50 DMA.
G10 rivals mostly firmer in response, with Franc and Yen also boosted by softer Treasury yields to trade above 0.8950 and 136.00 respectively.
Aussie lags as Westpac consumer sentiment declines and Yuan weakens in wake of below forecast Chinese activity data, AUD/USD capped by decent option expiries between 0.6700-10, USD/CNY and USD/CNH back over 200 DMAs.
Euro probes 1.0900 and the Pound eyes 1.2550 after overcoming weak UK labour metrics.
PBoC set USD/CNY mid-point at 6.9506 vs exp. 6.9500 (prev. 6.9654)

Fixed Income

Debt fades, but remains firmly underpinned ahead of busy pm agenda including primary US data and the latest raft of Fed speakers.
Bunds, Gilts and T-note all towards peaks of 136.38-135.81, 101.15-100.85 and 115-18+/06+ ranges.
40-year UK syndication entices investors and will raise almost 10% of the GBP 54bln book size.

Commodities

Crude benchmarks began the session firmer but have since eased into negative territory though only modestly so as broader risk sentiment deteriorates incrementally from initial best levels and as Chinese activity data remains a headwind.
WTI and Brent are circa. USD 0.40/bbl lower on the session and currently pivoting the USD 70.50/bbl and USD 74.50/bbl marks respectively.
IEA Monthly Oil Market Report: oil demand is set to increase by 2.2mln BPD in 2023 to a record of 102mln BPD (vs. April view of 101.9mln BPD). Click here for more detail.
China to cut diesel price by CNY 365/ton, according to NDRC.
Spot gold is within familiar parameters though was subject to a negative move in the early-European morning as the USD saw some fleeting upside while base metals are experiencing broader weakness after the downbeat Chinese activity figures.
Russia's Kremlin says many questions still remain open regarding the Russian part of the grain deal; Russia has to take a decision on whether to renew the deal or not.

Geopolitics

Ukrainian presidential office head said air defence systems were repelling attacks early on Tuesday and Twitter sources noted explosions in Ukraine's capital of Kyiv. Furthermore, Kyiv officials later said that the Russian attack was complex and exceptional in its density, but noted the vast majority of targets were shot down.
Five Russian border guards were injured in a Ukrainian drone attack on an observation post in the Kursk border region, according to Al Arabiya.
US senior administration official said US President Biden's Asia trip will show the US can both support Ukraine and maintain an unprecedented level of Indo-Pacific engagement, while Biden's talks with Japan and South Korea on the G7 sidelines are expected to cover economic security, expansion of military exercises and North Korea, according to Reuters.

US Event Calendar

08:30: April Retail Sales Advance MoM, est. 0.8%, prior -1.0%, revised -0.6%
08:30: April Retail Sales Ex Auto MoM, est. 0.4%, prior -0.8%, revised -0.4%
08:30: April Retail Sales Ex Auto and Gas, est. 0.2%, prior -0.3%
08:30: April Retail Sales Control Group, est. 0.3%, prior -0.3%
09:15: April Industrial Production MoM, est. 0%, prior 0.4%
09:15: April Manufacturing (SIC) Production, est. 0.1%, prior -0.5%
09:15: April Capacity Utilization, est. 79.7%, prior 79.8%
10:00: March Business Inventories, est. 0%, prior 0.2%
10:00: May NAHB Housing Market Index, est. 45, prior 45

Central Bank Speakers

08:15: Fed’s Mester Discusses the economic and Policy Outlook
10:00: Fed’s Barr Testifies Before House Financial Services Committee
12:15: Fed’s Williams Discusses Economic Outlook and Monetary...
14:30: Fed’s Goolsbee Speaks on Bloomberg TV
15:15: Fed’s Logan Moderates Panel Discussion at Atlanta Fed conferen
19:00: Fed’s Bostic and Goolsbee Discuss the Economic Outlook

DB's Jim Reid concludes the overnight wrap

Since the aftermath of the SVB failure in March we've been in an interesting and quite tight lower yielding range for bonds. When nothing much happens newsflow wise, yields want to edge up towards the top of the range and then when something negative happens (e.g. the FRB resolution and stress at other regionals) yields fall to the downside. Meanwhile equities are in a remarkably steady range at the moment, with the S&P 500 trading in just a 1.5% range over the last 6 sessions and about a 3.5% range over the last month (which includes the FRB stress and resolution).

That pattern has held over the last 24 hours with bond yields edging higher but equities still quiet. Bonds sold off (10yr US yields +3.9bps) yesterday thanks to hawkish remarks from Federal Reserve officials alongside continued concerns about the US debt ceiling. Regional banks were higher too which helped. With regards to the debt ceiling, after a holding pattern on this story over recent days, we should finally get some information today on how the negotiations are evolving, since it’s expected that President Biden will meet with Republican House Speaker McCarthy again. Publicly at least, the mood music has sounded more positive from the Democrats than the Republicans. For instance, President Biden said over the weekend that “I remain optimistic” and that “I really think there’s a desire on their part as well as ours to reach an agreement”. However, yesterday saw Republican Speaker McCarthy say that the two sides were “far apart” in the talks and that the Democrats were “not talking anything serious”. There continues to be posturing in the media from both parties as one GOP member who helped write the House Bill said there were three “red lines” for Republicans; no clean debt increase, no tax increase, and the bill must reduce the deficit. After the US close, Treasury Secretary Yellen in a letter to Congressional leaders reinforced that “we still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1”. Our rates strategists and economists have moved their base case up to early-June as well, see their note here

We’ll have to see how today pans out, but it’s clear that investors are still nervous about the issue, since the yield on 1-month T-bills rose a further +11.2bps yesterday, taking them up to a new cycle high of 5.531%. That’s a big kink at the front of the yield curve centred around the 1-month mark, which is when fears of a potential default are at their highest. Given an early-June x-date to avoid default, the key players might only have just over a couple of weeks to reach some sort of deal. Remember as well that as it stands, President Biden is going to set off tomorrow for several meetings over the week ahead, including the G7 leaders’ summit in Japan on May 19-21 and the Quad summit in Australia on May 24. So if the deadline does arrive on the early side of estimates, then there really isn’t that long left when all the key people will be in Washington.

Whilst Treasuries were heavily selling off at the very front end, they didn’t exactly perform well at longer maturities either, with yields on 10yr debt up +3.9bps on the day to 3.502%. They are a couple of basis points lower in Asia though. Yesterday’s moves came amidst several Fed speakers who pushed back on the idea that the Fed were about to reverse rates anytime soon. For instance, Atlanta Fed President Bostic said that his baseline was that “we won’t really be thinking about cutting until well into 2024”, which is at odds with market pricing that’s expecting 94bps of cuts by the time of the January 2024 meeting. Later on, Minneapolis Fed President Kashkari said that “We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down”. That saw investors price out some of the rate cuts they’d been expecting this year, with the rate priced in by the December meeting up by +2.8bps to 4.410%. In fact, fed futures yesterday pointed to a 20% of a hike during the June meeting, which is the highest it has been in 2 weeks. One dovish exception yesterday came from Chicago Fed President Goolsbee, who mentioned that there was “still a lot of the impact of the 500 basis points we did in the last year that’s still to come”, so explicitly warning of policy lags.

This backdrop saw equities move slightly higher, with the S&P 500 (+0.30%) posting a moderate advance. This was largely on the back of better cyclicals with semiconductors (+2.4%), banks (+1.9%), and materials (+0.9%) leading the way at the expense of defensives like utilities (-1.2%) and telecoms (-1.0%). The KBW Banks Index (+2.56%) saw decent gains following 4 weekly declines in a row. There was a +11.98% rise for Western Alliance Bancorp. Earlier European equities also ended the day in positive territory, with the STOXX 600 up +0.25%.

In other positive news, yesterday saw the relentless decline in European natural gas prices continue, with a further -1.38% decline to €32.31/MWh. That’s their lowest closing level since July 2021, and leaves them down by more than 90% since their peak last August. The picture for the winter ahead is looking increasingly optimistic, and storage levels are also above their seasonal averages for this time of year. Despite the better outlook on the inflation side though, European sovereign bonds traded in line with their US counterparts, with yields on 10yr bunds (+3.3bps), OATs (+2.6bps) and BTPs (+0.5bps) all rising on the day.

On the other hand Brent crude prices rose +1.43% to $75.23/bbl and WTI gained +1.53% to $71.11/bbl as news came out that the US would be filling the Strategic Petroleum Reserve with 3 million barrels of oil for delivery in August with the award announced next month. This comes after 200 million barrels were released last year.

Asian equity markets are mostly up this morning but gains are being trimmed after disappointing data from China (more below). As I type, the Nikkei (+0.90%) is leading gains in the region with the Hang Seng (+0.43%) and the KOSPI (+0.22%) also trading up. Elsewhere, stocks in mainland China are mixed with the CSI (-0.08%) just below flat while the Shanghai Composite is oscillating between gains and losses. S&P 500 futures are lower (-0.19%).

Coming back to China, industrial production for April rose by +5.6% y/y, falling much short of market expectations of a +10.9% increase and compared to a +3.9% rise in March after a muted start to the year. Additionally, retail sales advanced +18.4% y/y in April (v/s +21.9% expected), compared to a gain of +10.6% in the previous month. Meanwhile, fixed asset investments also fell short of expectations, rising by +4.7% y/y, against expectations of +5.5% and as against a +5.1% reading in March. This provides further evidence of the nation’s uneven recovery.

Elsewhere, the minutes from the Reserve Bank of Australia (RBA) indicated that the central bank still sees that further rate hikes “may be required”, depending upon how the nation’s economy and inflation evolve. Our economist thinks that overall the minutes make a June hike slightly less likely but that the comments on active QT are an interesting development. DB still favours one last hike in August. See more from our economist here.

Finally yesterday, the European Commission upgraded their forecasts for the Euro Area economy over this year and next. They now project 2023 growth at +1.1% (vs. +0.9% in Feb), and 2024 growth at +1.6% (vs. +1.5% in Feb). However, they did raise their inflation forecasts too, now seeing 2023 at +5.8% (vs. +5.6% in Feb) and 2024 at +2.8% (vs. +2.5% in Feb). Meanwhile on the data side, the US Empire State manufacturing survey for May fell by more than expected to -31.8 (vs. -3.9 expected). And Euro Area industrial production for March contracted by -4.8% (vs. -2.8% expected).

To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for April, along with the NAHB housing market index for May. Elsewhere, we’ll get the German ZEW survey for May, Canadian CPI for April and UK unemployment for March. From central banks, we’ll hear from ECB President Lagarde and the ECB’s Makhlouf, along with the Fed’s Mester, Barr, Williams, Goolsbee, Logan and Bostic. Finally, today’s earnings releases include Home Depot.

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