Events round-up

JN: GDP (q/q%), Q1: 0.4 vs. 0.2 exp.
AU: Wage price index (q/q%), Q1: 0.8 vs. 0.9 exp.
AU: Wage price index (y/y%), Q1: 3.7 vs. 3.6 exp.
US: Housing starts (k), Apr: 1401 vs. 1400 exp.
US: Building permits (k), Apr: 1416 vs. 1430 exp.

You got to ac-cent-tchu-ate the positive
E-lim-i-nate the negative, And latch on to the affirmative – Bing Crosby

US equities have more than reversed their losses incurred in the previous day with positive soundbites from President Biden and House Speaker McCarthy increasing hopes a bipartisan debt deal may be reached avoiding a government shutdown and US credit default. Main US equity indices have closed the day comfortably above 1% while UST yields have extended their recent rise with the curve showing a bear flattening bias. Sentiment has also been supported by encouraging deposit news from Western Alliance Bancorp and better than expected results and guidance from Target. The USD has extended its rise for a second consecutive day with gains in JPY and EUR only partially offset by gains in commodity linked currencies.

Speaking at the White House, just before departing to Japan, President Joe Biden said he was confident “we’ll get the agreement on the budget and that America will not default,”, the positive soundbite from the president were reinforced by House Speaker McCarthy who said he remained hopeful a deal could be reached, adding that he planned to stay engaged with negotiations

Markets have chosen to be optimistic, embracing the positive soundbites from both parties. Also playing into the positive vibes, both parties agreed to new smaller group of staff-level talks increasing hopes a bipartisan deal may be reached. History of course tells us that a deal is more likely than not to be reached on the 11^th hour, suggesting there is still room for a few bad headlines before a deal is finally reached. Yesterday we published a note on US Debt Disputes and Market Dynamics, noting how a spike in market volatility is a common theme across previous disputes, We also highlight that in the six episodes examined, in the month leading up to dispute resolution, the USD (DXY) has more often than not fallen (5 out of 6 occasions), Treasury yields mostly fell (5/6) and gold rose (5/6). AUD and US equity performance was more mixed. See here for here for more.

Sticking with the debt ceiling news, overnight the US Treasury updated its financial position, noting that its cash balance fell over $50b between Friday and Monday to just $87b, after larger than expected outflows, increasing the chance of the “X-date” being in early June.  Treasury has almost run through all of its authorised extraordinary measures to keep paying the bills.

The positive debt ceiling soundbites contributed to a rebound in US equities with main indices more than reversing their losses incurred in the previous day. The S&P 500 closed 1.18% higher while the NASDAQ was +1.28%. Of note regional US banks had a good day , buoyed by encouraging news from Western Alliance Bancorp. The bank reported another $200m rise in deposits over recent days, following the $1.8b increase from the end of the quarter reported over a week ago. The KBW banking index closed 3.74% higher and the regional banking index gained 5.7%. Meanwhile on the consumer sector, and after underwhelming figures and outlook from HomeDepo yesterday, overnight Target stuck to its positive outlook, posting higher-than-expected profit in the first quarter, although it did caution that “softening sales trends” may hinder short-term results. Target shares closed above 3%.

Core yields had a mixed night. European yields eased a couple of bps with 10y Bunds down 1.6bps to 2.33% while 10y UK Gilts climbed 2.2bps to 3.831%. Of note, overnight the 10y Bund sale of bonds was the most oversubscribed in almost three years (2.30x bid-to-cover, the highest since August 2020).

Positive political vibes seemingly contributed to the move up in UST yields with the curve showing a bear flattening bias. The 2y Note gained 6.5 bps to 4.15% while the 10y climbed 3.9bps to 3.58%. The 2Y/10Y UST curve was 3bp flatter at -58bp.  The 20Y UST auction saw indirect bid back above 70% and cleared a little through market, albeit as yields has sold off on the day.

On economic news, US Home building approvals have perked up a little . Total housing starts rose 2.2% to a 1.4m-unit in April. A rise in single-family permits drove the headline higher suggesting single-family construction could be at an early stage of a rebound supported by low inventories, apartment market conditions remain challenging.

Moving onto FX, the USD is slightly higher in index terms with the DXY and BBDXY indices up 0.30% and 0.22% respectively. The big dollar has performed well against the majors with JPY the main underperformer (-0.9% USDJPY up to ¥137.6) while the euro is 0.21%. Contrasting fortunes in rates markets helping the moves, particularly USD/JPY gains given the BoJ YCC policy. On the latter, worth noting yesterday Japan GDP rose 0.4% q/q in Q1, ahead of market expectations. Friday’s CPI figures are likely to show yet another increasing in the core reading, suggesting Japan has an inflation problem while the economy is rebounding driven by domestic demand. The BoJ ultra-easy policy looks outdated.

Higher risk sentiment supported commodity currencies with the NZD, AUD and CAD performing the best overnight, but with only small gains. The NZD is currently 0.6260 and the AUD is at 0.6660. One hindering factor for all commodity linked currencies has been the recently underwhelming China data releases. China’s reopening recovery is clearly stalling driving further CNY weakness, yesterday USD/CNY broke up through 7 for the first time this year.

Coming up

• This morning Australia gets the labour force report for April. Our economists have pencilled in a 25k rise in jobs and an unchanged unemployment rate of 3.5%, with risk biased to a one tenth rise to 3.6% (consensus 25k/3.5%).
• New Zealand’s Government releases its 2023 budget and our BNZ colleague note that this election-year Budget will be a relatively tight one, by all accounts. As it’s likely to show an increased struggle to restore operating surpluses, fiscal stimulus measures are likely to be thin on the ground. As the economy slows and storm costs become clearer, pressure on the bond programme is definitively up; it’s just a matter of judging the extent.
• Also this morning, Japan releases trade figures for April. Then tonight, attention shifts to the US with the Philly Fed Survey (-20 exp. from -31), Existing Home Sales (Apr 4.3m exp. vs 4.4m prev.) and jobless claims (253k exp vs 264k prev.) the main data releases to watch out for.
• BoE Huw Phil along with Fed Jefferson, Barr and logan speak.
• Alibaba and Walmart are among the companies reporting earnings today.