May 26th Financial News

Daily News

Summary:

McCarthy: Will continue to resolve differences over the long weekend in order to reach an agreement; BoJ Governor hinted at reducing stimulus measures; U.S. GDP in the first quarter rose to 1.3%...

【Quick Facts】

1. McCarthy: Will continue to resolve differences over the long weekend in order to reach an agreement.

2. Haskell: Cannot rule out further rate hikes.

3. The job market remained resilient as U.S. jobless claims rose moderately.

4. BoJ Governor hinted at reducing stimulus measures.

5. Guindos: Wages and profit margins pose upside risks to inflation.

6. U.S. GDP in the first quarter rose to 1.3%.

【News Details】

1. McCarthy: Will continue to resolve differences over the long weekend in order to reach an agreement.

On Thursday night, House Speaker McCarthy said that congressional Republicans and the White House still need to resolve some differences to reach an agreement before the deadline. "We know where our differences lie," McCarthy told reporters at the Capitol, adding that he intends to stay at the Capitol this weekend to continue our work. "We don't reach an agreement yet. It's difficult, but we're working on it until it's done." There is one week left before the U.S. Treasury runs out of funds, and the two sides communicated back and forth by phone rather than in person. The long weekend of the Memorial Day holiday is coming and most members of Congress are off.

The chance of the Fed raising interest rates in June rose to 49.4% as the debt ceiling negotiations have been unable to reach an agreement and "X" day is approaching.

2. Haskell: Cannot rule out further rate hikes.

BoE member Haskell said at an event at the Peterson Institute in Washington on May 25 that "some indicators indicate that the labor market is easing, but overall it remains very tight". He noted that job openings and unemployment rates remain historically high, as does the economic growth rate in wages.

Haskell also noted that high core inflation and subdued economic activity indicate that the supply side of the economy may have deteriorated. Faced with such uncertainty, he argues that it would be prudent for us to focus less on medium-term forecasts and more on near-term data and stresses that he prefers to head off risks to inflationary momentum.

Haskell said the MPC is committed to bringing inflation back to its 2% target in a sustainable way and will do so, but acknowledged that further rate hikes cannot be ruled out to achieve that goal.

3. The job market remained resilient as U.S. jobless claims rose moderately.

U.S. jobless claims this week was 229,000, a modest rise from last week. Despite the recent surge in applications, driven by fraudulent filings in Massachusetts, the overall situation remains consistent with a tight labor market. Initial jobless claims were lower, in line with recently released data on retail sales, factory production, and business activity. These data all show that the U.S. economy resumed its growth rate at the beginning of the second quarter. It also shows that the job market has remained resilient despite 500 bps rate hikes raised by the Fed since March 2022. Economists expect a mild recession until the second half of the year as the impact of rate hikes spreads. The U.S. real GDP annualized quarterly revision for the first quarter also rose, which economists had expected no revision.

4. BoJ Governor hinted at reducing stimulus measures.

BoJ Governor Kazuo Ueda hinted on Thursday that the central bank may scale back its monetary easing and eventually exit even if inflation falls below its 2% target. He noted that a sustained and steady rise in inflation is important. While the BoJ's policy guidance now explicitly mentions the need for wage increases to meet its inflation target, Ueda said in an interview that achieving wage growth itself is not the central bank's goal.

5. Guindos: Wages and profit margins pose upside risks to inflation.

ECB Vice President Guindos said in a speech on May 25 that upside risks to inflation stem from rising wages and expanding profit margins, while downside risks include: weaker lending if the banking sector faces renewed pressures. Future policy decisions will ensure that the policy rate reaches a sufficiently restrictive territory to bring inflation back to the medium-term target of 2% in time". Once reached, it will remain at these levels for as long as necessary.

6. U.S. GDP in the first quarter rose to 1.3%.

The revised data released by the U.S. Department of Commerce on May 25 showed that in the first quarter of 2023, the U.S. real GDP grew at an annual rate of 1.3%, mainly reflecting the upward adjustment of private inventory investment.

According to the data, in the first quarter, non-residential fixed asset investment, which reflects the investment status of enterprises, increased 0.7 percentage points to 1.4%; net exports of goods and services rose 0.4 percentage points to 5.2%; government consumption expenditure and investment increased from 4.7% to 5.2%, and consumer spending, which accounts for about 70% of the U.S. economy, slightly up 0.1 percentage points to 3.8%.

【Focus of the Day】

UTC+8 14:00 U.K. Retail Sales MoM (Apr)

UTC+8 15:40 Speech by ECB Chief Economist Lane

UTC+8 20:30 U.S. PCE (Apr)

UTC+8 20:30 U.S. Durable Goods Orders (Apr)

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Alex

Bond

The U.S. government could fall behind on its bills next month - and even default on its debt - if Congress doesn't raise a $31.4 trillion cap on government borrowing, a failure that could trigger economic calamity and panic on global financial markets.

What follows is a timeline showing how a cascade of missed payments could unfold, based on the U.S. Treasury's warning that it could run out of cash as early as June 1, and daily tax receipts and spending obligations projected by the Bipartisan Policy Center, a Washington-based think tank.

JUNE 1

The U.S. Treasury's cash coffers would run dry, causing it to hit the debt ceiling. The day's $21 billion in tax revenues would not be enough to cover about $101 billion in spending obligations promised by Congress.

Who wouldn't get paid? Possibly everybody expecting a check.

If the Treasury operated under a plan drawn up in 2011, it would not pick and choose which bills to pay and would instead wait until it had enough money to pay a full day's bills. Medical providers would get stiffed for $47 billion in payments from Medicare, the U.S public health insurance program for the elderly. Soldiers also would go unpaid.

Wall Street investors could still be paid for now, but there are risks. With debt principal payments coming due - including more than $100 billion on June 1 - the Treasury would borrow just enough to cover what's due and stay under the debt limit. If investors declined to lend that money out of fear they wouldn't get paid back, America could start missing payments and enter default on its debt, rocking the global financial system.

JUNE 2

Even if Washington kept paying debts on time, stock markets would likely be swooning. That could put pressure on Republican House Speaker Kevin McCarthy and Democratic President Joe Biden to act quickly. Republicans, who control one chamber in Congress, are demanding steep spending cuts in exchange for their support raising the debt ceiling.

Without a deal, another day of checks might not go out. Pensioners and other Social Security beneficiaries wouldn't get $25 billion owed them. States wouldn't receive $2 billion they are owed for Medicaid health insurance subsidies for the poor. By this time, broad swaths of the country wouldn't be getting paid.

JUNE 6

Weapons manufacturers and other companies supplying the U.S. military wouldn't collect $2 billion owed them.

JUNE 8

The crisis would deepen in U.S. hospitals as federal insurance payments fell further behind.

JUNE 9

More than a week into the crisis, it's possible some checks could finally go out. The U.S. Treasury would have collected about $105 billion in taxes since it stopped being able to add to the debt, enough to cover the bills from June 1. But more bills would keep coming due, and schools expecting $1 billion in federal funding would have to do without.

JUNE 15

Things would get extra dicey on June 15 when the Treasury is due to pay investors about $2 billion in interest payments on the national debt. The Treasury said in 2014 - following another near-collision with the debt ceiling - that it is technically capable of prioritizing interest payments over other obligations.

Provided that capability panned out, the day's inflow of business tax receipts would give the Treasury enough cash to make the debt payment. But revenues wouldn't cover all the other bills due June 15, such as military salaries.

Source: Reuters

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Warren Takunda

Traders' Opinions

The recent initial public offering (IPO) of Adnoc Logistics & Services, the maritime logistics arm of Abu Dhabi National Oil Co. (Adnoc), has taken the financial world by storm. With an impressive valuation and an overwhelming response from investors, the IPO has positioned Adnoc Logistics & Services as a force to be reckoned with in the maritime industry. This article explores the company's background, growth strategy, and the implications of its successful IPO.

Background and Operations

Adnoc Logistics & Services, a subsidiary of Adnoc, offers a comprehensive range of shipping, maritime, port, logistics, and oil field services. Its client base includes both Adnoc and international customers, and its operations span across 50 countries. With a fleet of over 500 vessels, the company has established itself as a major player in the global maritime industry.

Growth Strategy and Relationship with Adnoc Group Companies

Adnoc Logistics & Services has set forth a well-defined and ambitious growth strategy. Leveraging its existing relationship with Adnoc Group companies, the company aims to accelerate its growth trajectory. By capitalizing on synergies within the group, Adnoc Logistics & Services seeks to strengthen its market position and expand its service offerings. This strategic approach indicates a promising future for the company.

Successful IPO

The IPO of Adnoc Logistics & Services has undoubtedly been a resounding success. Priced at the top end of the range, it has garnered immense investor interest and has been met with orders worth a staggering $125 billion. This level of demand highlights the confidence and trust investors have placed in the company's prospects. Furthermore, with a 19% stake sold during the IPO, Adnoc Logistics & Services has secured substantial capital to fuel its growth plans.

The remarkable response to the IPO positions Adnoc Logistics & Services as a game changer in the maritime industry. The influx of funds will empower the company to invest in expanding its fleet, enhancing its logistical capabilities, and exploring new business opportunities. With its strong presence in the Middle East and a global footprint, Adnoc Logistics & Services is well-positioned to capitalize on the increasing demand for maritime services in the region and beyond.

Additionally, the successful IPO sends a positive signal to other companies in the industry, encouraging them to explore the potential of going public. The increased participation of maritime firms in the public market can foster competition, drive innovation, and ultimately benefit the industry as a whole.

The IPO of Adnoc Logistics & Services marks a significant milestone for the company and the maritime industry as a whole. With its vast array of services, global reach, and ambitious growth strategy, Adnoc Logistics & Services is poised for a prosperous future. The overwhelming response to the IPO demonstrates investor confidence in the company's potential and positions it as a catalyst for further developments in the maritime sector. As Adnoc Logistics & Services continues to leverage its strong relationship with Adnoc Group companies and capitalize on market opportunities, it is set to redefine the maritime industry's landscape in the years to come.

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Damon

Economic

Asian stocks could be poised to end a volatile and dramatic week on a strong note on Friday, especially tech, lifted by the Nasdaq's best day in three weeks on Thursday and hope that U.S. lawmakers are close to a deal on the debt ceiling.

Regional drivers on Friday include the latest snapshots of consumer price inflation in Tokyo, Australian retail sales, CPI inflation in Malaysia and manufacturing output in Singapore.

Local currencies, on the whole, are under pressure against a rampant dollar, which hit a two-month high on an index basis on Thursday as Fed rate expectations and U.S. bond yields surged higher.

The dollar broke above 140.00 yen for the first time in six months and could extend those gains on Friday if Tokyo inflation figures for April are on the weak side, taking the heat of the Bank of Japan to rethink its ultra-loose policy.

Annual core CPI inflation in the Japanese capital is expected to ease to 3.3% in April, a welcome sign for BOJ that inflation has perhaps topped out. Policymakers won't be complacent though - core CPI in Tokyo fell to 3.20% in March from 4.0% in January, only to rise again in April.

The dollar is on solid ground though, supported by the implied Fed terminal rate rising to a post-banking shock peak above 5.30%. What's more, the rate cuts long priced in for the second half of the year are getting whittled away too - down to 35 basis points now from around 100 bps earlier this month.

A strengthening dollar, higher implied Fed rates and rising U.S. bond yields often dampen risk appetite but the momentum in tech stocks, and in particular the euphoria around artificial intelligence, is something to behold.

A blowout forecast from Nvidia Corp sent the U.S. chipmaker's stock soaring 25% to a record high on Thursday, fueled a rally in AI-related companies, and lifted the Nasdaq 1.7%.

An index of U.S.-traded 'FANG' mega tech stocks is up a stunning 55% this year - perhaps some of that bullishness will spill over into Asian markets and break three-day losing streaks in the MSCI Asia ex-Japan index and the Hang Seng tech index.

While there is still no official deal in Washington on the debt ceiling, investors are acting like there will be one soon - Democrats and Republicans are just $70 billion apart on discretionary spending cuts which, once agreed, should seal the deal.

It's a relatively small amount, and just as well given the that Treasury Secretary Janet Yellen insists the government will run out of cash next Thursday. Figures on Thursday showed that Treasury's cash balance is down to just $49.47 billion.

On the Asian data front, Malaysian inflation is expected to ease to 3.3% in April from 3.4%, which would be the lowest in almost a year and further below last August's cycle peak of 4.7%.

Singapore's April manufacturing output, meanwhile, is seen slumping 0.7% from March and 4.4% from April last year. The wide range of economists' forecasts, however, suggests markets should not be surprised if the numbers are well off consensus.

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

- Tokyo CPI inflation (April)

- Malaysia CPI inflation (April)

- Australia retail sales (April)

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

The latest report on initial jobless claims in the United States reveals a modest increase to 229 thousand in the week ending May 20th. Although this figure represents a slight uptick from the previous week, it remains significantly below market expectations of 245 thousand. The data suggests that the labor market in the US continues to demonstrate resilience and constraint, indicating potential upward pressure on wages and offering the Federal Reserve an opportunity to consider further interest rate hikes to address inflationary concerns. Let's delve deeper into the implications of these findings.

Positive Labor Market Outlook

The lower-than-expected increase in jobless claims is a positive sign, indicating that the US labor market remains relatively robust. This data point aligns with the broader trend of declining unemployment rates and increasing job creation in recent months. The consistent downward trajectory of jobless claims over the past few weeks underscores the overall strength of the economy, suggesting a favorable environment for workers.

Wage Pressure Potential

The tight labor market, characterized by low jobless claims, may exert upward pressure on wages. With fewer people seeking unemployment benefits, employers face a limited pool of available talent. To attract and retain skilled workers, companies might need to offer higher wages and better incentives. This scenario bodes well for employees as increased wage growth can improve their purchasing power and contribute to overall economic growth.

Opportunity for Fed Interest Rate Hikes

The Federal Reserve, being vigilant about inflation, has been monitoring labor market indicators closely. The sustained strength and constraint observed in jobless claims could provide impetus for the central bank to consider additional interest rate hikes. By tightening monetary policy, the Fed aims to balance economic growth while preventing excessive inflation. The favorable labor market conditions strengthen the case for such actions, ensuring that inflationary pressures remain in check.

Four-Week Moving Average

Examining the four-week moving average, which smooths out weekly volatility, we observe an unchanged figure of 231.75 thousand. This result is notable as it reflects a consistent trend of stable jobless claims. A sustained low level of claims over multiple weeks is indicative of a healthy labor market and increased job stability. Consequently, this can boost consumer confidence and drive further economic activity.

Regional Variations

On a seasonally unadjusted basis, jobless claims increased by 1.3 thousand to reach 202.0 thousand. While this rise may appear marginal, it is worth noting the significant variations across states. Texas and Connecticut experienced notable increases in claims, potentially due to localized factors. However, declines were observed in Massachusetts and Michigan, offsetting some of the overall increase. Monitoring regional dynamics provides valuable insights into the localized impact of economic factors on the labor market.

The latest data on initial jobless claims in the United States indicates a modest rise that fell short of market expectations. This outcome underscores the resilience and constraint of the labor market, offering potential opportunities for wage growth. The Federal Reserve may view these figures as supportive of its ongoing efforts to address inflation, potentially leading to further interest rate hikes. Overall, the labor market's positive performance and stable trends in jobless claims contribute to a favorable economic outlook for the United States.

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Warren Takunda

Traders' Opinions

The Dow Jones Industrial Average extended its decline for the fifth consecutive session as investor confidence wavered due to ongoing concerns regarding the sustainability of US government debt. Despite efforts to achieve a breakthrough in negotiations, the outcome remained elusive, further exacerbating market uncertainty. While the Nasdaq Composite experienced a notable gain of over 2%, propelled by a tech rally fueled by Nvidia, the S&P 500 also managed to make modest gains of 0.6%. This column aims to delve into the factors behind the Dow's decline, the positive performance of the Nasdaq, and the broader implications for the US economy.

Dow Jones' Underperformance

The Dow Jones Industrial Average faced a continued downward trend as investors grappled with concerns surrounding US government debt. The lack of a significant breakthrough in negotiations intensified these worries, as investors sought reassurance regarding the long-term sustainability of the nation's debt burden. The failure to achieve a resolution during the virtual meeting held by the White House on Thursday morning contributed to the ongoing market uncertainty. As a result, market sentiment remained cautious, prompting many investors to shift their focus away from equities and towards alternative investment opportunities.

Tech Rally Propels Nasdaq's Performance

In contrast to the Dow's decline, the Nasdaq Composite posted an impressive gain of over 2% during the same trading session. This surge was primarily driven by Nvidia, a leading technology company, whose earnings and revenue beat market expectations. Nvidia's robust performance, combined with a stronger-than-anticipated revenue guidance, attributed to the soaring demand for AI chips. This positive news regarding Nvidia's outlook helped boost investor confidence in the tech sector, leading to substantial gains in the Nasdaq index.

US Economic Growth and Jobless Claims

Despite the prevailing concerns over government debt, the US economy showcased resilience. Recent data revealed that the economy experienced stronger growth than initially estimated in the first quarter. This unexpected positive development, coupled with jobless claims rising less than anticipated, reinforced the case for further interest rate hikes from the Federal Reserve. The data indicated that the underlying fundamentals of the US economy remained relatively strong, potentially mitigating some of the market's fears surrounding the sustainability of government debt.

The continued decline of the Dow Jones Industrial Average underscores the need for investors to exercise caution and diversify their portfolios. The uncertainties surrounding government debt sustainability can significantly impact market sentiment and trigger increased volatility. While the Nasdaq's notable performance provides a glimmer of hope for tech-focused investors, it is crucial to remain vigilant and evaluate each investment opportunity carefully.

Furthermore, the positive economic growth and jobless claims data indicate that the US economy continues to demonstrate resilience. However, it is imperative to monitor the Federal Reserve's response to these developments, as further interest rate hikes could impact various sectors differently. Investors should stay informed about the central bank's policies and consider adjusting their investment strategies accordingly.

The Dow Jones' fifth consecutive decline reflects investor concerns regarding the sustainability of US government debt, despite ongoing negotiations. The Nasdaq's notable gain, fueled by Nvidia's strong financial performance, offers a ray of hope for tech investors. However, the broader economic indicators, such as stronger-than-expected growth and manageable jobless claims, highlight the underlying strength of the US economy. Investors should remain cautious, diversify their portfolios, and closely monitor the Federal Reserve's actions as they navigate through the current market conditions.

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Justin

Central Bank

Economic

"Some" versus "several" debate seemingly favours a June pause

The minutes to the May Federal Open Market Committee meeting show that there is a split as to whether there will be the need to raise interest rates further. Some members felt that based on the newsflow to date, getting inflation back to target “could continue to be unacceptably slow”, which would mean “additional policy firming would likely be warranted at future meetings”. However, “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”. Our interpretation is that “several” probably exceeds “some”, but the key take-away is that “Many participants focused on the need to retain optionality after this meeting" – i.e. data dependency.

In terms of the economic backdrop, inflation remained “unacceptably high” although “participants judged that risks to the outlook for economic activity were weighted to the downside”. Federal Reserve staff continue to forecast that “the effects of the expected further tightening in bank credit conditions, amid already tight financial conditions, would lead to a mild recession starting later this year, followed by a moderately paced recovery”. It was unsurprising to see the Fed acknowledging that a “timely” increase in the US debt ceiling is “essential “avoid the risk of severely adverse dislocations in the financial system and the broader economy”. Their concerns will be higher now.

Comments from officials suggest the debate remains similarly balanced

The tone of the minutes reflects the balance of the Fed comments we have subsequently heard. Fed Chair Powell appears to be in the camp leaning towards a pause. In response to a question from Nick Timiraos at The Wall Street Journal during the FOMC press conference on whether policy is now “sufficiently restrictive”, Chair Powell responded “Policy is tight, you see that in interest-rate sensitive activities and you are beginning to see it more and more in other activities. And if you put the credit tightening and the quantitative tightening on top of that, I think we may not be far off, we’re possibly even at that level.”

However, the hawks are still pushing for more action with non-voter James Bullard favouring potentially two more 25bp rate hikes and voting member Neel Kashkari and Fed Governor Chris Waller suggesting it is premature to declare that the tightening cycle is over. Others though are more open to the idea of a pause given the 500bp of hikes enacted since March last year has been the most aggressive and rapid period of monetary policy tightening for 40 years. With monetary policy operating with long lags before it really has an impact on the economy there are several FOMC members making the case, similarly to Jerome Powell, that they are considering skipping the June meeting and will reconsider the situation in July.

We still favour the next move being a rate cut, but the timing is difficult

The market has significantly repriced the outlook for Fed policy. Just two weeks ago they were looking at rates having peaked and a first 25bp rate cut coming in September with nearly 100bp of cuts by the January 2024 FOMC meeting. Now there is a 30% chance of a 25bp hike and a 65% chance by the July FOMC meeting. Cuts are still priced before year end, but no-where near to the same extent.

What happens next will come down to the data and events, such as inflation, jobs, the debt ceiling showdown and what is happening with the state of the banking sector and the impact on the flow of credit. Our central view is that tighter lending conditions will do the Fed’s work for it and further rate rises aren’t necessary. However, we acknowledge that many at the Fed want to see clear evidence that inflation is destined to head back to 2%. We think June will see a “skip” outcome, which will then be extended with rates now at their peak.

We then have a 50bp rate cut in November and December with the Fed funds rate down to 3% in the second quarter of 2024. This is certainly more aggressive than the market pricing and economist consensus. It reflects our concern that the effects of tighter lending conditions are underplayed and the resulting economic slowdown will dampen inflation more rapidly than the market does. We readily accept that the risks are skewed towards this economic pain being felt later than we predict with relatively strong household and corporate balance sheets mitigating some of the headwinds.