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Bond Market Insights - Thurs, 01 June 2023

Federal Reserve officials were hinting at a potential pause in interest-rate hikes in June, but it was not enough to reassure a fading stock market. The mood had been soured poor China PMI’s, a shortfall in the Chicago PMI, the hot JOLTs report, Mester less than placating remarks and, some bad earnings reports led by Advance Auto Parts, whose stock fell 35% after missing forecasts. There was not much mention of the debt ceiling.

Rates chatter pointed to the build of open short interest in the UST futures market. Shorts are at levels not seen since 2000 as traders bet on a hawkish Fed and a deluge of issuance once the debt ceiling issue is resolved. The JOLTS data should have had more of a negative impact, but initial selling had no follow through. The market may need a bit more of a rally to shake out some of the shorts before it can make a decisive move down. US Treasuries remained bid with yields sliding another 6-9bps across the curve.

This morning the ceiling limit deal has passed the House and is on its way to the Senate. This should bring a wave of treasury issuance on top of the $25B in 3 day bills coming tomorrow, which will carry us through June 5th.

Today is ADP (I was a bit premature with my announcement yesterday) and Initial Claims followed by ISM Manufacturing data at 10:00am.

It is worth casting an eye over Europe. European stocks closed May with their biggest monthly drop this year as luxury companies slumped after data showed China’s economic recovery faltering. The French CAC 40 is set for its worst month since September. Almost 20% of the index comprises of the three big luxury companies: LVMH, Hermes and Kering. The commodity-heavy FTSE 100 Index has now erased all its 2023 gains. Over the month the Stoxx Europe 600 has dropped 3.2%.

On the European data front inflation data showed CPIs cooling in both Germany and France, following on from the drop in Spain’s on Tuesday, raising hopes that the overall Eurozone CPI today will be lower than consensus. Italy was an outlier though, y/y hitting 8.1%, versus 7.6% expectations.

Asia shows more variety. Hong Kong’s Hang Seng fell 2%, Taiwan just managed to close unchanged on the day and Japan’s TSE achieved record volumes with almost 7tn in turnover compared to the old highs of 5.8trn made back in 2013. This was due to a large MSCI re-balancing. The importance of MSCI is made evident by the latest Korean efforts to change regulations and market access in order to join the Developed Nations bucket.

Month end related buying of Asia Credit from real money lent support to the day. Sovereigns were ¼ to ¾ pt better. The new EIBKOR 33 continued to lag, widening to +95/+94, the new HKINTL Green Bonds are trading at the reoffer spread. The long-end of the market continued to be bought by Taiwan and Japan Lifers. China IG is opening 2-3bps wider, overnight we did see more selling of low beta names


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