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Bond Market Insights - Thurs, 11 May 2023

US CPI data showed the first reading below 5% in two years, slightly better than expected, but still running at more than double the Fed's target rate of 2%. Wage growth slowing over the past 18 months and the more volatile components of core inflation declined. Airline fares, which tracked fuel and benefited from a surge in demand last year, have dropped 2.6%. Similarly, aggressive price increases in the lodging business are being met with declining occupancy rates, forcing further reductions. The CPI lodging index rose at an 18% annualized rate in the three months to April, compared to the previous three months, so hefty declines are expected.

Core-core CPI, which excludes rents, airline fares, lodging costs, and health insurance, was up 0.19% in April, constrained by modest increases in healthcare costs, falling prices for household furnishings, and a steep drop in vehicle rental prices.

The US Treasury market moved higher and steeper on CPI, the market predicting that the Fed will pivot towards an easing bias throughout the rest of the year. The curve finished much steeper. 5yr/30yrs moved to +11bp, and at one point there was a 50% chance of a 25bp cut priced into the July meeting. This all seems a little too optimistic. CPI has been stagnant at elevated levels, ECI and NFP are still giving high prints. The madness of crowds.

The market all but ignored the 10yr auction. Today we finish off this week’s issuance with the new long bond, but eyes will be on PPI which, barring any surprise, the market should take well.

China IG remained firm yesterday, with most interest in the longer end from a wide swathe of investors. In India IG 3yr paper was popular, while renewables were under pressure. Overall spreads were about 2bps tighter. China property failed to turn around. HPDLF (Hopson) was under the spotlight tumbling -5-8pts after news that the company obtained a 1yr extension for USD100mn private notes. Real money and private banks were sellers. This hit the rest of the sector down about-2pts. COGARD 25's (Country Garden) is now in priced in the $40's and longer dated bonds are in the $30's.

The Bank of England is priced for +25bps hike, which the whole world seems to agree with. UK inflation is over 10% y/y with core CPI stubbornly over 6%. Markets are pricing in a total of 50-75bps of hikes going forward.

This morning Asia IG is opening slightly tighter again in the absence of any new issuance.

A note on Wynn Macau, who reported Q1 23 results. Net revenue increased 101% y/y, up 215% q/q, reaching 48% of the 1Q 19 level. Adjusted property EBITDA was positive both y/y and q/q, recovering to 40% of the 1Q 19 level, in line with consensus. Performance was impacted by renovations and maintenance and a loss of VIP market share at both Wynn Macau and Wynn Palace. However, there was a robust recovery in mass market share at Wynn Palace. Hotel occupancy was at 95%. Both and direct VIP turnover increased in April 2023. Looks quite positive for the B+/B2 credit, although caveat emptor, the gaming sector is always prone to headwinds.


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