The Morning Update

Monday May 15th, 2023

Written by:
Paul Harrison

The US$ slips, oil prices inch higher, equity markets are up, and US yields rise on optimism for US debt ceiling breakthrough. Risk-on sentiment improves as investor optimism improves that US politicians will be able to negotiate a solution to the debt-ceiling impasse, after President Biden voiced optimism that a deal could be reached. The US debt ceiling continues to be the major focus for investors this week with strategists warning about market turmoil if politicians don't agree to raise the $31.4 Tn borrowing limit. This morning, Eurozone industrial output fell sharply in March as output of capital goods plunged, the sharp reduction appeared to be a result of disappointing figures from Ireland. This week, Monday NY Fed Empire Manufacturing Tuesday China Retail Sales & Industrial Production, CAD inflation report, US Retail Sales & Industrial Production. Wednesday Eurozone CPI, US Housing Starts & BoE Governor Bailey speaking. Thursday US Initial Jobs & Existing Home Sales. Friday Japan CPI, ECB Lagarde speaks & US monetary policy research conference with Fed Chair Powell, Fed Williams & Former Chair Bernanke speaking.

In other news. Turkey poised for runoff vote as Erdogan under threshold. Biden & McCarthy to resume debt ceiling talks on Tuesday. G7 leaders to target Russian energy, trade in new sanctions steps. Ukraine gets pledges of Eur2.7bn military aid from Germany and the UK promise more weapons including long range drones as Sunak meets Zelensky. China launches projects to build 'new-era' marriage, childbearing culture. Philippines' finance minister says no reason for rate hike.

In currency news. The Turkish Lira weakened as the country faces a runoff vote in two weeks. Thailand's THB hit 5-week highs as opposition parties lead vote. The US$ slips from 5-week highs and CNY tested 8-week lows. CNY is flat, while Asian currencies are up 0.1% on average vs US$. Trading currencies are mixed with JPY down 0.35%, NOK weakens 0.2% MXN & SEK slip 0.1% while CHF is up 0.15%, NZD firms 0.4%, AUD strengthens 0.5% vs US$.

Oil prices edges higher as markets balance tight supplies offsetting ongoing economic concerns. C$ gains in early trading as risk-sentiment improves and commodity prices strengthen on optimism of a resolution to the US debit ceiling impasse. Investors will be focused on Tuesday's key CAD CPI report where inflation is expected to ease to 4.1% April vs 4.3% previously. If the inflation rates do fall as expected markets anticipate it the BoC will keep interest rates on 'pause', and continue to monitor inflation levels through the summer. We expect CAD gains to be limited heading into US debt ceiling talks and CAD inflation data on Tuesday.

EURCAD slips in early trading as firmer commodity prices are supporting the CAD.

EUR stalls below 1.0900 despite improving risk-on sentiment. Data from the Eurozone showed that industrial production contracted to 4.1% in March, keeping pressure on the single currency in early trading. Over the weekend the ECB officials delivered mixed messages regarding the banks policy outlook. ECB VP De Guindos told an Italian news paper that they have now entered the home stretch of the monetary policy tightening path. Peter Kazimir countered the ECB VP's comments saying "the ECB may need to raise interest rates longer than previously thought to help tame inflationary pressures". A light economic docket today, so expect investors to remain on the sidelines ahead of Tuesdays US Retail Sales, ECB Lagarde Speech and US debt ceiling talks.

EURGBP slips in early trading on the back of disappointing industrial output results and less hawkish comments from the ECB VP suggesting inflationary pressures are easing.

GBP retests 1.2500 amid improving risk sentiment and a weaker US$. The pound gained ground in early trading amid improved risk sentiment and a weaker US$ after President Biden's comments that he was optimistic about Tuesday's debt-ceiling talks. The BoE cautious tone about future rate hikes with Governor Bailey saying that he was optimistic about the inflation outlook could stall further GBP gains. Today we expect the pound to consolidate its gains as it waits Tuesday's key US Debt ceiling talks, US Retail Sales and Wednesday's BoE Governor Bailey's speech.