Focus Increase on the US Debt Ceiling

Market movers today

PMI figures will draw markets’ attention today. In the euro area, services will probably remain the main growth (and inflation) driver for now, but it will be interesting to see whether manufacturing finally shows some positive spill-over effects from the Chinese re-opening. US PMIs will shed some light on economic activity after a blurry March picture.

We also have several potential Moody’s and S&P sovereign debt ratings coming out for Ireland, France and Italy among others. We expect an upgrade of Ireland.

The 60 second overview

The confrontation between US and China continues as US President Biden will try to limit US investments in several key parts of the Chinese economy.

Yesterday, we had a string of comments from various Federal Reserve officials stating the need for bringing down inflation; more tightening could be needed and thus pushing Fed funds above 5%. However, some also argued for prudence and the need to monitor the credit tightening from banks as well. Hence, this indicates that we are getting closer to the end of the tightening cycle.

US Treasury yields declined on the back of weaker US data and negative sentiment in the equity market and the comments from the Federal Reserve could not change this.

There is increasing focus on the debt ceiling after the lower than expected tax payments indicating that the Treasury may run out of money already in June as discussed in our note from yesterday, Research US – X-date looms closer as ‘Tax Day’ disappoints, 20 April. If we go back to 2011 during the debt ceiling “crunch” in July 2011 and until Mid-august, when the US Treasury was expected to “run out of money”, 10Y US Treasury yields fell from 3% to 2.05%, while Bunds rallied some 70bp and the Bund spread widened from 45bp to 70bp. Hence, the debt ceiling debacle will not only have impact on US Treasuries but also a big impact of European government bond yields.

We have also had a string of comments from ECB officials regarding the need for tighter monetary policy among others Lagarde saying that there is “a little way to go on that path”. There will be more speeches today from various ECB officials.

Equities: Global equities lower yesterday with consumer staples, utilities, and industrials higher. Hence, not a classic sector rotation but at the end of the day it was a defensive turn and risk-off tone dominating with VIX ticking higher. Many Fed speakers yesterday combined with a busy reporting schedule and eye-catching macro numbers did not make it easy for investors to find out which way to lean. In US Dow -0.3%, S&P 500 -0.6%, Nasdaq -0.8% and Russell 2000 -0.5%. Asian stocks are lower this morning and to a large extent matching the moves we saw on Wall Street yesterday. US and European futures are mixed this morning.

FI: US Treasury yields declined on the back of weaker US data and negative sentiment in the equity market and moderate hawkish comments from the Federal Reserve could not change this.

FX: US yields fell yesterday as macro data disappointed, but EUR/USD remains in consolidation around 1.0950. Japanese core inflation surprised to the upside during the night and we continue to expect the BoJ to phase out YCC in either June or July. Next round of QT from the Riksbank is on the cards today, but thus the FX impact of previous auctions has been muted.

Credit: Secondary credit spreads moved decisively higher yesterday, with iTraxx Xover widening almost 11bp and Main 2.3bp. The spread between Sr financials and iTraxx Main widened for the first day since early April, indicating slightly rising concern about the banking sector.

Nordic macro

Today, the Riksbank will sell SEK750m +/-750m each of SGB1061 (Nov-29) and SGB1056 (Jun-32). Note that the Riksbank has increased the tolerance interval for the volumes to +/-750m in each bond (previously +/-375m). This increases the flexibility for the Riksbank and as we interpret it, mean that they can abstain from selling any bonds if they do not find bids attractive enough. That said, we would expect to see good demand for the two SGBs up for sale today.