EMEA Morning Briefing: Debt Ceiling Progress, China Data May Lift Sentiment

MARKET WRAPS

Watch For:

Manufacturing PMI data for eurozone, U.K., Germany, France, Italy; E.U. ECB accounts of its last monetary policy discussions, unemployment, flash estimate euro area inflation; U.K. nationwide house price index, money and credit; Germany retail trade; trading updates from Remy Cointreau, Naturgy Energy Group, Auto Trader Group, SAS, Sberbank, Ryanair Holdings

Opening Call:

Stock futures point to gains in Europe after the U.S. debt ceiling deal was approved by the House. In Asia, stock benchmarks were broadly higher; the dollar weakened; Treasury yields were little changed; while oil futures gained and gold fell.

Equities:

European shares look set to gain at Thursday's open tracking progress in the U.S. debt ceiling and as investors assess economic data and speculate on the likely Federal Reserve rate action at its meeting on June 13-14.

The U.S debt deal advanced as the House passed a bill that suspends the federal government's $31.4 trillion debt ceiling in exchange for spending cuts.

Passage of the deal sends the measure to the Senate, where leaders have promised quick action, and President Biden has said he is eager to sign the measure into law.

Meanwhile, U.S. Labor Department data Wednesday showed an increase in job openings in April, reversing three months of declines and renewing investor concerns that the Fed isn't finished lifting interest rates.

However, two Fed officials yesterday signaled that they were increasingly likely to hold interest rates steady at their June meeting, barring a sizzling jobs report on Friday, before preparing to raise them again later this summer.

"A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle," Fed governor Philip Jefferson said in a speech Wednesday.

Philadelphia Fed President Patrick Harker, a voting member of the FOMC this year, also endorsed holding rates steady in June.

Ronald Temple, chief market strategist at Lazard, said a strong jobs report on Friday would add to the case for a rate hike, as the Fed cannot afford to pause prematurely with core inflation well above 5%.

"If you can get some clarity on a recession, its timing, and what the Fed is going to do, hopefully we'll get some greater breadth that will allow the market to push higher. Without those things, we're kind of stuck," said Michael Arone, chief investment strategist at State Street Global Advisors.

Forex:

The dollar weakened in Asia after the China Caixin manufacturing PMI bounced back to expansionary territory in May.

Even if there's Congressional approval of the U.S. debt-ceiling deal, there's likely to be massive amount of T-bill issuances to replenish depleted Treasury coffers, which threatens to seize liquidity and roil markets, said Vishnu Varathan, head of Economics & Strategy at Mizuho Bank.

The JOLTS data also reminds Wall Street that "this economy has a labor market that doesn't want to break," Oanda said.

Oanda added that anyone who thinks the Fed is done hiking won't be able to shake off labor market strength if Friday's payrolls report confirms the trend.

It also expects wage pressures to push inflation higher, "which should seal the deal for more Fed rate hikes."

The idea that the Fed isn't finished is helping support the greenback.

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The euro could weaken further as signs of moderating inflation in parts of the eurozone indicate the European Central Bank may soon end interest rate rises, Rabobank said.

"The market is already comfortably priced for further rate hikes and moderating price data and the threat that the eurozone is facing stagnation in the second half suggest that the EUR can sink further vs. the USD in the coming weeks," it said.

In contrast, U.S. data have "largely not been playing along with the view that Federal Reserve policymakers can afford to relax."

Bonds:

Treasury yields after Federal Reserve officials signaled they were inclined to keep the policy interest rate steady at the next meeting in June, allowing policymakers to see more economic data before making decisions about the extent of additional monetary tightening.

Markets are now pricing a pause in rate hikes in June, reverting a recent trend, amid mixed economic signals.

"At the moment, our baseline is that the Fed remains on hold at the June meeting, but there are clear risks of at least one more hike over the next two meetings," said Deutsche Bank economists.

"[M]arket measures of long-run inflation expectations have been on the rise recently, especially relative to fundamental drivers like oil prices...Up to today, we have 6 officials -- 4 are voters -- appearing to favor more hikes (Bowman, Logan, Waller, Kashkari, Bullard, Mester), while 5 officials -- 3 are voters -- leaned towards pausing (Powell, Goolsbee, Jefferson, Collins, Bostic). Three officials (Williams, Barkin, Daly) are open to both options and the other 3 voters (Harker, Barr, Cook) have yet to comment since the May meeting," it said.

This distribution of voters could make the June meeting outcome "extremely sensitive to the May payroll and CPI inflation data" to be released over the next two weeks, they added.

Markets are now pricing in a 27.5% probability that the Fed will raise interest rates by 25 basis points to 5.25% to 5.50% after its meeting on June 14, down from 70% Wednesday morning, according to the CME FedWatch tool.

Labor data Thursday and Friday will be closely watched.

Energy:

Oil futures gained in Asia boosted by China's Caixin manufacturing PMI data, which rebounded into expansionary territory in May after months of contraction.

A June 4 meeting of OPEC+--the Organization of the Petroleum Exporting Countries and its allies, including Russia--is now in focus.

"I tend to think that OPEC+ will leave production unchanged unless the Brent curve is trading in contango at the close on Friday," Robert Yawger, executive director of energy futures at Mizuho Securities, said.

In contango, later-dated futures trade at a higher price than nearby futures.

"Contango greater than cost of carry, which kicks in at 50 cents to a dollar, is worst case scenario for all producers, and OPEC+ would likely do their best to nip deep contango in the bud before it can grow," he said.

Metals:

Gold futures fell early Thursday as investors track Fed officials' comments and the progress in the U.S. debt-ceiling.

The debt-ceiling deal means attention is turning back to the Fed, said Adrian Ash, director of research at BullionVault.

The precious metal has lost the $2,000 level for now, the "underlying price continues to hold very firm, supported by Asian consumer demand as well as by ongoing central-bank gold purchases," Ash said.

The fact that prices are this high "in the absence of heavy investment demand suggests there is lots of scope for gold to rise sharply when financial markets next hit trouble, whether or not that's led by anxiety over the USA's massive and growing public debt," he added.

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Copper prices gained as investors welcomed the U.S. vote to approve the government debt-ceiling deal.

The gains also followed the release of China's latest Caixin manufacturing PMI for May, which bounced back to expansionary territory for the first time in months.

Still, analysts cautioned that the upside for copper prices looks limited.

Analysts at Galaxy Futures point to broadly rising inventory levels abroad as a sign of weakness in global demand.

Domestic buying activities have been highly price-sensitive, which means demand could quickly weaken once prices recover, they added.

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Iron ore prices jumped in early China trade, as investor sentiment got a boost from the Caixin manufacturing PMI data, which rebounded into expansionary territory in May after months of contraction.

The upturn in the steel-making ore also follows the U.S. vote to approve its government debt ceiling deal.

However, analysts continue to advise caution.

Brokerage Galaxy Futures notes that Chinese steel producers' iron-ore buying interest is likely to remain soft in the near term.

Its analysts' channel checks suggest muted production activities at mills due to weak downstream demand, especially continued pressure in the real-estate sector, a main source of steel and iron-ore demand in China.

TODAY'S TOP HEADLINES

Debt Ceiling: House Approves Deal Struck by Biden and McCarthy

WASHINGTON-The House passed a sweeping bill that suspends the federal government's $31.4 trillion debt ceiling in exchange for spending cuts, as Republican Speaker Kevin McCarthy muscled through a deal struck with President Biden to avert a looming government default.

The 314-117 vote relied on support from both Republicans and Democrats. Passage of the deal sends the measure to the Senate, where leaders have promised quick action, and Biden has said he is eager to sign the measure into law. Treasury Secretary Janet Yellen has said the government could run out of the cash it needs on June 5 to pay its bills on time and warned of severe economic damage and market disruptions unless Congress acts.

China Caixin Manufacturing PMI Returns to Expansion in May

A private gauge of China's factory activity bounced back to expansion in May, the first improvement in the manufacturing sector's health since February.

The China Caixin manufacturing purchasing managers index rose to 50.9 in May from 49.5 in April, according to data released Thursday by Caixin Media and S&P Global. The 50 mark separates expansion from contraction.

Fed Prepares to Skip June Rate Rise but Hike Later

Federal Reserve officials signaled they are increasingly likely to hold interest rates steady at their June meeting before preparing to raise them again later this summer.

Investors in recent days had expected the Fed would lift rates at its meeting June 13-14, prompting two policy makers Wednesday to publicly underscore their preference to forgo a hike, barring a sizzling jobs report on Friday.

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June 01, 2023 00:15 ET (04:15 GMT)

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