US stocks declined amid debt limit impasse, US-China frictions and mixed data - Newsquawk Asia-Pac Market Open

• US stocks were pressured and extended to the downside throughout the session as debt limit negotiations continued to lack any breakthroughs with 9 days remaining to the X-date and with sentiment also dampened after US lawmakers threatened retaliation to China's Micron (MU) ban, while the data releases in the US were mixed with the S&P Flash PMIs for April showing continued growth momentum in services although manufacturers struggled.
• USD notched mild gains amid a risk-off tone in equities although gains were capped amid the debt ceiling impasse and after mixed data releases, while the latest Fed rhetoric provided very little incrementally as Kashkari suggested they need more data and that if inflation stays high, they may need to keep rates higher.
• Looking ahead, highlights include Australian Leading Index, New Zealand Retail Sales, RBNZ Rate Decision and Press Conference, Supply from Australia.

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LOOKING AHEAD

• Highlights include Australian Leading Index, New Zealand Retail Sales, RBNZ Rate Decision and Press Conference, Supply from Australia.

US TRADE

EQUITIES

• US stocks were pressured and extended to the downside throughout the session as debt limit negotiations continued to lack any breakthroughs with 9 days remaining to the X-date and with sentiment also dampened after US lawmakers threatened retaliation to China's Micron (MU) ban, while the data releases in the US were mixed with the S&P Flash PMIs for April showing continued growth momentum in services although manufacturers struggled.
• SPX -1.12% at 4,146, NDX -1.28% at 13,673, DJIA -0.69% at 33,056, RUT -0.43% at 1,788.
• Click here for a detailed summary.

NOTABLE HEADLINES

• Fed's Kashkari (voter) said need to get more data about the economy and it is possible a mild recession would bring inflation down, while he added if inflation stays high, they may need to keep rates higher.
• Fed's Logan (voter) said the speed of transactions has highlighted the need to manage liquidity risks and every bank should be ready to borrow from the Fed. Logan added that if all banks regularly tested the Discount Window access it would eliminate the stigma and Fed backstops should be available whenever banks need it, including nights, weekends and holidays.
• US Treasury asked US agencies if payments can be made at a later date as the deadline nears and are putting agencies on alert, while aides are searching for new ways to prolong the X Date beyond existing measures and planning has become increasingly urgent in recent days, according to Washington Post.
• US House Speaker McCarthy said he is not all close to a debt ceiling deal with the White House, according to Punchbowl. Fox’s Pergram also reported that House Speaker McCarthy said no regarding if they were close to a deal and that they still want to spend more money next year than they did this year which is the red line but could still finish this by June 1st.
• US House Speaker McCarthy said he has not spoken to US President Biden yet today and they will work until they get it all done, while he is not scheduled to go to the White House today. It was also reported that White House negotiators left the Capitol after about two hours of debt ceiling talks, according to Punchbowl.
• US GOP Rep. McHenry said the top-line disagreement remains on spending and cannot say when negotiations will resume.
• US GOP Rep. Graves said Republicans and the White House are still far apart on a debt ceiling deal after Monday night talks. Graves also said that he does not think things are going well regarding debt ceiling discussions and negotiators will be meeting again shortly, while he added that until the White House understands the spending crisis, they are not going to be able to move forward. Furthermore, Graves later commented that they don't have additional meetings set up.
• US GOP Rep. Hern said House Speaker McCarthy told Republicans that they are closer every day on a debt ceiling deal and have got to get there, while he told lawmakers to stay within 24hrs.
• US House Democratic Leader Jeffries said not a lot of progress has been made towards a resolution.

DATA RECAP

• US Manufacturing PMI Flash (May) 48.5 vs. Exp. 50.0 (Prev. 50.2)
• US Services PMI Flash (May) 55.1 vs. Exp. 52.6 (Prev. 53.6)
• US Composite Flash PMI (May) 54.5 (Prev. 53.4)
• US Richmond Fed Manufacturing Shipments (May) -13 (Prev. -7.0)
• US Richmond Fed Composite Index (May) -15 (Prev. -10.0)
• US Richmond Fed Services Index (May) -10 (Prev. -23.0)
• US New Home Sales-Units (Apr) 0.683M vs. Exp. 0.665M (Prev. 0.683M, Rev. 0.656M)

FIXED INCOME

• Treasuries strengthened and unwound earlier losses as risk conditions soured amid a lack of a debt ceiling deal and with tailwinds from a stellar 2yr auction.

FX

• USD notched mild gains amid a risk-off tone in equities although gains were capped amid the debt ceiling impasse and after mixed data releases, while the latest Fed rhetoric provided very little incrementally as Kashkari suggested they need more data and that if inflation stays high, they may need to keep rates higher.
• EUR retreated beneath the 1.0800 handle against the firmer dollar with the single currency not helped by mixed PMI data from the bloc including a deeper contraction in German and EU manufacturing activity.
• GBP marginally weakened and GBP/USD briefly dipped beneath the 1.2400 handle before clawing back some of the losses, while there were several BoE comments including Governor Bailey who noted the MPC will adjust the Bank Rate as needed to return inflation to the target sustainably and reiterated that further tightening in policy would be required.
• JPY was flat against the dollar with price action in USD/JPY choppy around a 138.50 focal point.

COMMODITIES

• Oil prices rose gradually despite the firmer dollar and risk-off conditions, with prices supported amid Saudi jawboning and Russian gasoline export ban warnings.
• US Energy Inventory Data (bbls): Crude -6.8mln (exp. +0.8mln), Cushing +1.7mln, Gasoline -6.4mln (exp. -1.1mln), Distillate -1.7mln (exp. +0.4mln).
• Saudi Energy Minister said OPEC+ must be vigilant and proactive. Saudi’s Energy Minister also said that he keeps telling speculators that they will be "ouching" and were hurt in April, while he would tell them to watch out.
• Iraq’s Oil Minister said Iraq is committed to maintaining stability and helping the growth of the global economy, while he added that he is still waiting for a response from Turkey regarding the pipeline.
• Qatar’s Energy Minister said the worst is yet to occur regarding European energy shortages.
• Dubai set the official crude differential for August at parity to DME Oman.
• Russia is considering a possible gasoline export ban to prevent domestic fuel shortages and price hikes following the subsidy cuts to refiners, while the government may also increase volumes of mandatory gasoline sales on the commodity exchange, according to Reuters sources.

GEOPOLITICAL

• Russia's Security Council Deputy Chairman Medvedev said the more destructive the weapons Kyiv gets, the closer the possibility of a nuclear apocalypse.
• Russian Defence Ministry said two US air force strategic bombers were detected on Tuesday approaching the Russian border over the Baltic Sea. The fighter jet was sent to prevent a border incursion although the border was not violated and the Russian plane returned to base.
• Russian Navy chief visited Iran's defence factories, according to IFX.
• Ukraine's Deputy Minister said Ukraine's Black Sea port of Pivdennyi halted operations due to Russia refusing to allow ships through.

ASIA-PAC

• US National Security Advisor Sullivan suggested that President Biden and Chinese President Xi speak on the phone in June and for in-person talks to occur in September, according to SGH Macro. It was also reported that China's Commerce Minister Wentao is to hold talks with US Commerce Secretary Raimondo and USTR Tai on May 25th/26th although the Chinese side reportedly does not have particularly high hopes for this meeting.
• White House said China's recent announcement on Micron (MU) is "not based in fact", while they are troubled by recent action and raids targeting American firms and are communicating the administration's views to China via the Commerce Department.
• US Democratic Leader Schumer said he is working with US President Biden to make clear to China that its action against Micron (MU) is unacceptable.
• US House China Select Committee Chair said the Commerce Department should add Changxin Memory Technologies (CXMT) to the entity list and that China’s actions against Micron (MU) are the latest example of economic coercion to intimidate the US government from implementing export controls, while the Commerce Department should ensure no US export licenses are granted to firms operating in China which are used to backfill Micron.
• Chinese Premier Li said China is willing to expand trade ties with Russia, according to CCTV. Furthermore, China and Russia are to boost industry and agriculture cooperation, while Chinese Special Envoy Li Hui is to visit Russia on May 26th.
• China's Commerce Ministry said it firmly opposes the US and Taiwan trade agreement and urges the US to stay cautious in Taiwan's economic and trade ties.
• Germany's new strategy for China relations was delayed due to policy differences within the government and won't be in place in time for the June 20th bilateral talks, according to Reuters sources.
• Dutch Foreign Minister absolutely sees China as a priority partner for the country due to its tremendous size and importance in global and regional affairs.

UK/EU

• BoE Governor Bailey said the MPC will adjust the Bank Rate as needed to return inflation to the target sustainably in the medium term and reiterated that further tightening in policy would be required. Bailey said there are risks of inflation persistence and the BoE has to respond, while he also stated that they must not attempt to fight inflation with very severe increases in rates and that they are nearer to the peak on interest rates.
• BoE's Mann said financial conditions are not tight and cannot make judgments about the peak in rates which is data dependent.
• UK Trade Secretary Badenoch said should see an answer soon on Brexit auto rules and discussions with the EU are ongoing.
• ECB President Lagarde said rates are to reach "sufficiently restrictive levels" and will stay restrictive for as long as necessary.
• ECB's de Guindos said a more comprehensive macroprudential framework should be a priority to ensure that non-banks are more resilient.

DATA RECAP

• UK Flash Manufacturing PMI (May) 46.9 vs. Exp. 48.0 (Prev. 47.8)
• UK Flash Services PMI (May) 55.1 vs. Exp. 55.5 (Prev. 55.9)
• UK Flash Composite PMI (May) 53.9 vs. Exp. 54.6 (Prev. 54.9)
• German Manufacturing Flash PMI (May) 42.9 vs. Exp. 45.0 (Prev. 44.5)
• German Services Flash PMI (May) 57.8 vs. Exp. 55.3 (Prev. 56.0)
• German Composite Flash PMI (May) 54.3 vs. Exp. 53.5 (Prev. 54.2)
• EU Manufacturing Flash PMI (May) 44.6 vs. Exp. 46.0 (Prev. 45.8)
• EU Services Flash PMI (May) 55.9 vs. Exp. 55.6 (Prev. 56.2)
• EU Composite Flash PMI (May) 53.3 vs. Exp. 53.5 (Prev. 54.1)