June 2nd Financial News

Daily News

Summary:

The U.S. House of Representatives has passed a debt ceiling bill; ADP makes rate hike expectations rise; liquidity crisis may cause market concerns...

[Quick Facts]

1. U.S. manufacturing activity contracted for the seventh consecutive month in May.

2. The U.S. House of Representatives has passed a debt ceiling bill.

3. Harker: Fed should stop raising rates, at least in June.

4. ADP makes rate hike expectations rise.

5. liquidity crisis may cause market concerns.

6. Bullard: prospects for continued disinflation are good, and continued vigilance is required.

[News Details]

U.S. manufacturing activity contracted for the seventh consecutive month in May

Data from the U.S. Institute for Supply Management (ISM) on Thursday showed that the manufacturing PMI fell to 46.9 in May from 47.1 in April. This is the seventh consecutive month that the index has been below the 50-year mark, indicating a contraction in manufacturing. It's the most durable contraction since the Great Recession. And new orders continued to slump amid rising interest rates, but the employment indicator rose to its highest level in nine months.

The continued weakness in PMI readings supports analysts' expectations that the economy will fall into recession this year. However, there have been several periods, including the mid-1990s and the mid- and late-1980s, when prolonged periods of PMI below 50 were not accompanied by a recession.

The U.S. House of Representatives has passed a debt ceiling bill

The U.S. Senate will consider a bill on Thursday to raise the ceiling for the government's $31.4 trillion debt, with just four days left to pass the bill and send it to Democratic President Joe Biden to sign into law, thus avoiding a catastrophic default.

The bill would temporarily remove the debt ceiling until Jan. 1, 2025. In exchange, the government will limit its spending.

Harker: Fed should stop raising rates, at least in June

Philadelphia Fed President Patrick T. Harker said in a speech yesterday that the Fed should not raise interest rates at its next meeting, despite the disappointingly slow decline in high inflation. He may change his mind if the monthly employment data released on Friday or inflation data released next week is much stronger than expected.

The economy is expected to grow less than 1% this year and the unemployment rate (currently at 3.4%) will rise to about 4.4%.

If unemployment rises faster than Harker currently predicts or inflation comes down faster, he could think the Fed will cut rates.

His baseline forecast is that interest rates remain unchanged, allowing time for inflation to fall. He favors maintaining what he currently sees as a "reasonably broad" path to avoid a possible recession if the Fed tightens policy too much.

The current interest rates are considered to be in restrictive territory and can stay there for some time. "We don't have to keep moving rates up, and then have to reverse course quickly."

ADP makes rate hike expectations rise

The ADP data released on Thursday showed that 278,000 new jobs were added, well above the expected 170,000. ADP also easily beat expectations last month (recording 296,000 jobs compared to 150,000 expected), which was also reflected in the strong payrolls data. Bias has been a powerful force in financial markets recently, so the market is likely to incorporate more upside risk into the upcoming non-farm payrolls data.

Following the release of the data, CME's FedWatch Tool showed that the probability that the Fed will leave rates unchanged in June is 66.8% and the probability of a 25 basis point rate hike is 33.2%.

liquidity crisis may cause market concerns

The U.S. government hit the debt ceiling of $ 31.4 trillion in January this year. The Treasury Department then took "unconventional measures" to avoid a debt default. By May 30, the amount available in the general account of the U.S. Treasury has been reduced to less than $40 billion.

Once the bill on the federal government debt ceiling and budget is signed into law, the debt ceiling impasse is temporarily eased. The U.S. Treasury will act quickly to fill this account, meaning the Treasury will put a lot of short-term Treasury bonds into the market, which will draw a lot of liquidity from the market.

As it stands now, the new Treasuries issued could reach about $1.4 trillion. If the U.S. government in the short term issues large-scale bonds and implement the current high-interest rates, it may attract a lot of money originally to be invested in other subjects or stored in banks. This will not only exacerbate the recent widespread deposit outflow from the banking sector, so that banks will face greater liquidity pressure but also may push up short-term loans and bond rates, raising funding costs for companies already under pressure in a high-interest rate environment.

Bullard: prospects for continued disinflation are good, and continued vigilance is required

In an article released Thursday titled "Is Monetary Policy Sufficiently Restrictive," St. Louis Fed President James Bullard pointed out that in terms of current macroeconomic conditions, interest rates are at the low end of a sufficiently restrictive range level. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.

At the same time, he noted that where within the sufficiently restrictive zone should the policy rate be? And are there other factors to consider (e.g., financial stability)? Such assessments could be reflected in judgments by the FOMC going forward.

[Focus of the Day]

UTC+8 20:30 U.S. Non-Farm Payrolls (May)

Risk Warnings and Disclaimers

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Alex

Economic

Markets think the Fed will "skip" June hike, but strong jobs could change that

When Federal Reserve Chair Jerome Powell opened the door to a potential Fed pause after the May FOMC meeting, financial markets swiftly priced a Fed peak with potentially 100bp of rate cuts by January 2024. However, strong jobs, sticky inflation and a raft of hawkish comments from some prominent regional Fed officials saw this completely reversed. As of last Friday a June hike has been seen as more likely than not, with perhaps just a couple of cuts priced by next January. This week though, comments from Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker reignited the prospect of skipping a hike in June and a reassessment in July. There is clearly a core group at the Fed who think 500bp of rate hikes and tighter lending conditions may mean they have done enough.

We outlined our U.S. rates view and the risks surrounding it in this report. It is that the Fed has peaked and we will get rate cuts from the fourth quarter onwards but we must acknowledge that if we get a strong jobs report and U.S. CPI comes in hot on 13 June, the day ahead of the 14 June FOMC meeting, that could be enough to tip the balance in favour of another hike.

Some data points to strong gains

At the moment, the consensus is for the economy to add 195,000 jobs in tomorrow's report, which is lower than the 253,000 outcome for April. In fact, none of the 69 organisations surveyed by Bloomberg expect payrolls to come in stronger than last month, which is a little surprising. In terms of the numbers we have seen, we know that job openings remain incredibly high and are in fact larger than the total number of Americans that regard themselves as unemployed. This means that a lack of people with the required skill sets continues to restrict hiring.

Yet today's ADP jobs release reported private payrolls rose 278k versus the 170k consensus - it is a bit of a black box model that doesn't have a great track record in predicting actual payrolls. Then we have the homebase data on hourly employed workers which was OK and the ISM manufacturing employment which pointed to modest growth. Then there are comments from St. Louis Fed economist Max Dvorkin, reported by MNI as saying that their real-time labour market index points to household employment (not the same as payrolls) rising 638k!

But other data is more cautious

Nonetheless, we continue to see the number of job lay-off announcements climb. Indeed, today's Challenger job lay-offs report for May showed 80,089 total for lay-offs, up 13,094 on April's level, giving a 286.7% year-on-year change. Hiring announcements totalled just 7,885 versus 23,310 in April. This is the lowest hiring figure since November 2021 and before then, you have to go back to February 2016 to find a lower number than reported today. Yesterday, we had the Federal Reserve's Beige Book which suggested that "Employment increased in most Districts, though at a slower pace than in previous reports".

Watch for slowing wage growth despite record low unemployment

Putting it all together, we have some very contradictory signals, meaning we have little confidence in our own 200k forecasts and an acknowledgement that pretty much anything could happen. That said, the payrolls number isn't the only figure to watch. Unemployment fell to 3.4% last month, however, it is wages that will probably get more attention given the Fed's wariness that tight labour markets could keep service sector inflation higher for longer. Last month, it rose 0.5% month-on-month, but the market expects this to slow back to 0.3%.

Nela Richardson, chief economist at ADP, commented within their report that they saw the second month where there has been a "full percentage point decline in pay growth for job changers," before adding that "pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring."

Inflation could be the clincher

In terms of consensus expectations, the market is looking for 195k jobs with unemployment ticking up to 3.5% from 3.4% and average hourly earnings rising 0.3% MoM. If we get something similar to that we are likely to see the market remaining of the view that the Fed will not change policy at the June FOMC meeting, but leave the door open for a possible July rate hike.

However, if we get a 250k+ figure on jobs and wages rise 0.4% MoM or above and unemployment stays at 3.4%, we suspect it is likely to move in the direction of a 50:50 call for a hike. That would leave the outcome determined by the May CPI report, due out the day ahead of the Fed meeting. A 0.4% MoM core CPI print would put the decision on a knife edge and could give enough ammunition to push another hike over the line.

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

In a significant development for the US housing market, the average rate on a 30-year fixed mortgage has reached its highest level in six months. According to a survey conducted by mortgage giant Freddie Mac, the rate rose to 6.79% in the week ending May 31st, 2023, up from 6.57% in the previous week. This surge is in line with the Federal Reserve's aggressive tightening measures, leading to growing market expectations of another rate hike. As a result, industry experts anticipate a potential weakening in purchase demand as rates approach the seven percent threshold. US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

Rising Mortgage Rates and Economic Outlook

The recent spike in mortgage rates can be attributed to the buoyant state of the US economy. A thriving economy has instilled confidence in the market, leading to an adjustment in the pricing of mortgage rates. Sam Khater, Chief Economist at Freddie Mac, noted that the rise in rates comes as the market prices in the likelihood of another Federal Reserve rate hike. The current rate of 6.79% is significantly higher than the fixed rate of 5.09% during the same period last year.

Impact on Housing Market

The increasing mortgage rates are expected to have implications for the US housing market. Over the past months, there has been a steady flow of purchase demand, primarily driven by attractive rates in the low to mid six percent range. However, with rates inching closer to the seven percent mark, experts anticipate a potential weakening in this demand. Higher mortgage rates generally lead to increased borrowing costs, making homes less affordable for prospective buyers. As a result, this development could potentially slow down the pace of home purchases and impact the overall growth of the housing market.

Effects on Real Estate Investments

Rising mortgage rates also have implications for real estate investors. Higher borrowing costs can reduce the affordability of investment properties and potentially affect the returns on such investments. Investors who heavily rely on financing to acquire properties may face challenges in finding favorable terms and interest rates. Moreover, the rising mortgage rates could also impact the demand for rental properties, as potential tenants may reconsider their housing choices in light of increased costs.

Federal Reserve Policy and Future Outlook

The Federal Reserve's aggressive tightening measures have played a significant role in the recent surge in mortgage rates. The central bank's actions are aimed at addressing inflationary concerns and maintaining economic stability. However, the impact of these actions on the housing market is a delicate balancing act. While higher rates can help curb inflation, they also have the potential to dampen economic activity, especially in sectors like housing. Therefore, it will be crucial to closely monitor the Federal Reserve's future policy decisions and their implications for mortgage rates and the overall housing market.

The US 30-year mortgage rate has reached a six-month high, reflecting market expectations of another Federal Reserve rate hike. This increase comes amidst a buoyant economy and the need to address inflationary pressures. However, the rising mortgage rates may weaken purchase demand as affordability becomes a concern for prospective buyers. Additionally, real estate investors may face challenges due to higher borrowing costs. It remains essential to monitor future Federal Reserve policy decisions to better understand their impact on mortgage rates and the broader housing market.

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Damon

Economic

Asian markets are looking for a positive end to the week on Friday following a solid rally on Wall Street the day before, as the U.S. debt ceiling vote passed its first congressional hurdle and hopes rose that the U.S. economy will achieve a 'soft landing'.

South Korean inflation for May is the main regional economic indicator on the calendar, and the won could also get a jolt from revised first quarter GDP growth figures. Otherwise, Friday's impetus looks set to come from Thursday's 'Goldilocks' trading on U.S. markets.

A batch of indicators suggested U.S. inflationary pressures are cooling, which could allow the Fed to pause its rate-hiking cycle later this month, while other data showed the labor market remains strong.

A win-win for risky assets.

A weaker dollar and lower Treasury yields also helped fuel the surge in U.S. stocks, with the Nasdaq and tech sector once again the highest fliers. The Nasdaq is on track for a sixth straight weekly gain, which would be its best run since 2019.

Contrast that with China, where purchasing managers index reports for May were mixed, broader economic data is weak, the central bank is expected to ease policy soon, and investors are pulling their money out of the country.

Little wonder the yuan is sliding further below 7.00 per dollar to fresh 2023 lows on a near daily basis.

The dollar's strength against the yuan on Thursday is telling, because it was not replicated across Asia. The Indian rupee registered its biggest rise in three months after PMI data showed factory activity in India grew last month at the fastest pace in two and a half years.

This follows Wednesday's surprisingly strong GDP data.

The Australian dollar had its best day in six weeks, and the Japanese yen rose for a fourth consecutive session - its longest winning streak since November.

Global markets on Friday will take their cue from the U.S. employment report for May but its release comes after Asian markets close, leaving Korean CPI and revised GDP as potentially the main market-moving economic indicators.

Annual inflation is expected to ease to 3.30% from 3.70% in April, which would be the lowest since October 2021.

Here are three key developments that could provide more direction to markets on Friday:

- South Korea CPI inflation (May)

- South Korea GDP (Q1, revised)

- Japan monetary base (May)

Source: Yahoo

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

Adnoc Logistics & Services, a subsidiary of the state-owned Abu Dhabi National Oil Company (Adnoc), has experienced a remarkable surge in its stock price, jumping by an impressive 52% after its highly anticipated initial public offering (IPO) in Abu Dhabi. This extraordinary performance reflects the market's overwhelming confidence in the company's potential and the growing attractiveness of the energy sector.

The IPO, which raised a substantial $769 million, marks a significant milestone for Adnoc Logistics & Services and further demonstrates Adnoc's commitment to diversifying its operations and unlocking value for its stakeholders. It follows the successful listing of another Adnoc subsidiary earlier this year, highlighting the company's strategic approach to capitalizing on the financial markets' favorable conditions.

Investor enthusiasm for Adnoc Logistics & Services was evident from the remarkable demand generated during the IPO. The company received orders worth an astonishing $125 billion, reflecting the strong interest from both institutional and retail investors. This overwhelming response underscores the belief in the company's growth prospects and the potential for attractive returns.

Adnoc Logistics & Services is positioned as a key player in the logistics and services sector, supporting the oil and gas industry in Abu Dhabi and beyond. With a wide range of offerings, including shipping, maritime, and onshore and offshore support services, the company plays a crucial role in facilitating the seamless transportation and distribution of energy resources. Its robust infrastructure and strong track record have attracted investors seeking exposure to the thriving energy market in the United Arab Emirates.

The successful IPO of Adnoc Logistics & Services not only provides a boost to the company's financial standing but also supports the broader ambitions of Adnoc and the Abu Dhabi government. By unlocking value through public offerings, Adnoc can raise capital to fund its ambitious expansion plans, enhance its operational capabilities, and further diversify its revenue streams.

The impressive market response to the Adnoc Logistics & Services IPO reflects the positive sentiment surrounding the energy sector, driven by increasing global energy demand, favorable oil prices, and the company's strong fundamentals. Investors are recognizing the potential for long-term growth and value creation in this vital industry, and Adnoc Logistics & Services is well-positioned to benefit from these positive dynamics.

As the stock continues to attract attention and demonstrate its potential, it is essential for investors to closely monitor the company's financial performance and its ability to execute its growth strategy effectively. Additionally, factors such as geopolitical developments, oil price fluctuations, and regulatory changes should be taken into account when evaluating investments in the energy sector.

The impressive performance of Adnoc Logistics & Services' stock following its IPO serves as a testament to the confidence investors have in the company's future prospects. It also highlights the continued attractiveness of the energy sector for investors seeking opportunities in stable and resilient industries. Adnoc's successful listing adds to the vibrancy of the Abu Dhabi stock market and reinforces the emirate's position as a leading regional hub for business and investment.

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Justin

Central Bank

Economic

Improving cross-border payments is a key priority for the G20. At the 2023 Digital Monetary Institute symposium in London, Tommaso Mancini-Griffol, deputy division chief of monetary and capital markets at the International Monetary Fund, said that Libra, Facebook’s attempt at a global currency, delivered a ‘collective shock’ to the public sector. He highlighted the inadequacies of cross-border payments: high costs, low speed and inadequate transparency.

One of the most promising solutions to these problems is the interconnection of central bank digital currency systems. This is an attractive concept because of the global surge in CBDC development. It is hoped that, as these state digital payments systems emerge, the work of creating a seamless cross-border payments system to bridge the gaps will already have been done.

Project Icebreaker versus Project mBridge

Even within this approach, however, there are different strategies. Two projects with distinct philosophies were showcased at the DMI symposium. Project Icebreaker is a collaboration between the Bank of Israel, Norges Bank and Sveriges Riksbank, in coordination with the Bank for International Settlements Innovation Hub Nordic Centre, that aims to connect retail CBDC systems. Project mBridge is a multi-CBDC platform developed by the BIS Innovation Hub Hong Kong Centre, Hong Kong Monetary Authority, Bank of Thailand, People’s Bank of China and the Central Bank of the United Arab Emirates. It is the largest multi-CBDC project involving cross-border transactions.

Both Project Icebreaker and Project mBridge are multi-CBDC platforms for cross-border payments. Both aim to reduce the costs and increase the speed of cross-border transactions. However, there are key differences in the design and architecture of the models that have implications for interoperability and scalability of the platforms .

The first and perhaps most important distinction is that Icebreaker aims to interlink domestic retail CBDCs while mBridge is a platform for wholesale CBDCs – in other words, inter-bank settlement. However, although individuals will not interact directly with mBridge, the improvements to the speed and the reductions to the cost of their cross-border transactions should still improve their experience of transacting with counterparties in participating countries.

The primary difference for retail users of Icebreaker versus mBridge relates to the integration of foreign exchange liquidity provision. Project Icebreaker is a hub-and-spoke system that connects different rCBDC systems of countries (spokes) to a hub, which serves as a marketplace for foreign exchange providers who are willing to provide settlement in more than one currency.

There are minimal technical preconditions for the rCBDC systems that connect to the hub: they must be a real-time or near-real-time payments system, be able to implement and support the use of hashed time locked contracts and have entities that can act as foreign exchange providers within the rCBDC system. Because foreign exchange providers are within the hub in Icebreaker, this ensures both competition and transparency of on-platform foreign exchange transactions.

In contrast, Project mBridge has foreign exchange off platform, which means that end users do not have access to the same degree of choice or market transparency. Making provisions to facilitate foreign exchange dealing on bridge was one of the post-pilot recommendations to improve the project. In 2023 and 2024, the roadmap for mBridge will focus on integrating foreign exchange price discovery and matching into the platform.

Flexibility and scalability

In terms of scalability, the hub-and-spoke model of Icebreaker minimises the number of connections between domestic rCBDC systems, so it can scale up to support many participating systems without increasing the complexity of the design. The hub routes payment messages and does not act on them – its only action is selecting best foreign exchange rates for the payer. Requirements to be part of the system are low, which allows central banks to have autonomy when designing rCBDC systems, but still participate in an interlinked system enabling cross-border payments.

Project mBridge, however, does not support the use of bridge currencies, which might limit the flexibility of the platform. Since it will only be able to facilitate transactions between currency pairs with liquid trading, this could limit the future scalability of the system. Integrating foreign exchange price discovery might change this. With foreign exchange liquidity provision integrated in the platform, exchanging one currency for another via a bridge currency might be accomplished as a two-part transaction relatively smoothly.

Despite being further ahead in foreign exchange liquidity provision and scalability, Project Icebreaker has so far only focused on core features with limited use cases. Before becoming a minimum viable product, Icebreaker still needs to determine a governance arrangement, anti-money laundering and counter-terrorism financing compliance and monitoring, and legal considerations regarding conflict of regulations between connected rCBDC systems.

Here, the mBridge model has clear advantages. Because of its uniquely designed distributed ledger, it uses a decentralised model to address governance considerations. As explained by Mu Changchun, director-general of the Digital Currency Research Institute at PBoC, for cross-border payments, a trustless, decentralised approach via DLT is appropriate to ensure all participating countries trust the integrity of the network.

So far, Icebreaker and mBridge have varied in architecture, technology and use of bridge currencies in the development of the two multi-CBDC cross-border payments systems Whether the two will converge or take different approaches to governance, foreign exchange liquidity provision and other factors remains to be seen.

Source: Arunima Sharan

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Justin

Central Bank

Economic

Markets think the Fed will "skip" June hike, but strong jobs could change that

We outlined our US rates view and the risks surrounding it in this report. It is that the Fed has peaked and we will get rate cuts from the fourth quarter onwards but we must acknowledge that if we get a strong jobs report and US CPI comes in hot on 13 June, the day ahead of the 14 June FOMC meeting, that could be enough to tip the balance in favour of another hike.

Some data points to strong gains

At the moment, the consensus is for the economy to add 195,000 jobs in tomorrow’s report, which is lower than the 253,000 outcome for April. In fact, none of the 69 organisations surveyed by Bloomberg expect payrolls to come in stronger than last month, which is a little surprising. In terms of the numbers we have seen, we know that job openings remain incredibly high and are in fact larger than the total number of Americans that regard themselves as unemployed. This means that a lack of people with the required skill sets continues to restrict hiring.

Yet today’s ADP jobs release reported private payrolls rose 278k versus the 170k consensus - it is a bit of a black box model that doesn’t have a great track record in predicting actual payrolls. Then we have the homebase data on hourly employed workers which was OK and the ISM manufacturing employment which pointed to modest growth. Then there are comments from St. Louis Fed economist Max Dvorkin, reported by MNI as saying that their real-time labour market index points to household employment (not the same as payrolls) rising 638k!

But other data is more cautious

Nonetheless, we continue to see the number of job lay-off announcements climb. Indeed, today’s Challenger job lay-offs report for May showed 80,089 total for lay-offs, up 13,094 on April’s level, giving a 286.7% year-on-year change. Hiring announcements totalled just 7,885 versus 23,310 in April. This is the lowest hiring figure since November 2021 and before then, you have to go back to February 2016 to find a lower number than reported today. Yesterday, we had the Federal Reserve’s Beige Book which suggested that “Employment increased in most Districts, though at a slower pace than in previous reports”.

Rise in lay-offs points to shift in payrolls

Putting it all together, we have some very contradictory signals, meaning we have little confidence in our own 200k forecasts and an acknowledgement that pretty much anything could happen. That said, the payrolls number isn’t the only figure to watch. Unemployment fell to 3.4% last month, however, it is wages that will probably get more attention given the Fed’s wariness that tight labour markets could keep service sector inflation higher for longer. Last month, it rose 0.5% month-on-month, but the market expects this to slow back to 0.3%.

Nela Richardson, chief economist at ADP, commented within their report that they saw the second month where there has been a “full percentage point decline in pay growth for job changers," before adding that "pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring."