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Bond Market Insights - Thu 29 June 2023

Wall Street’s biggest banks passed the Federal Reserve’s annual stress test. The Fed projected that the hypothetical calamities would cause banks to lose $541 billion, including $100 billion commercial and residential mortgages, assuming a 40% slump in commercial real estate prices.

US treasuries followed bunds higher, hitting early NY selling ahead of Powell’s appearance at the Sintra meeting. He was on a panel with Lagarde, BoE’s Bailey, and BoJ’s Ueda. He reiterated his statements post-FOMC and at last weeks congressional testimony, saying that policy may not be restrictive enough and more rate hikes may be needed. He defended the decision to pause he added he would not rule out hiking at consecutive meetings, he would not say if more "skip meetings" were in the cards. He did add that the risk of doing too little is greater than doing too much, with regard to social costs associated with entrenched inflation. He also admitted that “Quite a large majority (of the FOMC) wanted two or more hikes”.

ECB's Lagarde opined that the ECB "Still have ground to cover", "if baseline stands, we'll likely hike in July". September is data dependent, "not seeing enough tangible evidence" of falling underlying inflation. To reinforce that Italy CPI in line, up 0.1%mom in June, year-ended at 6.7%. Perhaps some more guidance as to how they are going to drain the liquidity out of the market might be more helpful… just saying.. in Germany SME's are already suffering and they account for over 80% of German employment, every rise in rates has a damaging impact. Inflation in North-Rhine Westphalia has just been released,. 6.2% y/y, well above the previous month. .National CPI data is due later today with it estimated to reach 6.3% up from 6.1% previously.

BoE's Bailey, following the much maligned 50bp hike, said the UK economy turned out to be "much more resilient", which was the main reason hike in June, that there were "clear signs of persistence" in inflation and that the tightening cycle "not nearly done" at the moment. The tone of the FOMC mentioned above is similar to that of the BoE meeting, where CIO UK Weekly notes “the conviction behind the move, backed by seven of the nine committee members, and the forceful language in the meeting minutes also made everyone rethink where this cycle will end.”

In Japan BoJ's Ueda said if "we become reasonably sure" about the "second part" of BoJ inflation forecast (that inflation will rise in 2024), adding "that would be a good reason for reconsidering policy change", more of a nuance than a statement.

Back to bonds.

In Asia yesterday non-China HY bounced, overcoming the slide on Monday, excepting Adani bonds, was around +1pt higher over the week. Adani is down 1-2pts this week after reports that the SEC have made enquiries about representations made by Adani Group to US investors. Adani enterprises disclosed to BSE Ltd: “We are not aware of any subpoena to the US investors. All of our disclosures are a matter of public record. It is routine that various regulators will seek access to public material in an easy & referenceable manner”.

Dalian Wanda is in the headlines. Its onshore debt issuance application was cancelled, without a precise reason being disclosed. DALWAN US$ bonds are down 2-3pts today. On the plus side ICBC did agree to grant loan extensions. Lots to digest.

Today is Hari Raya Haji in Singapore, Eid Al-adha elsewhere in the Muslim world. Have a great day.


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