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US Treasury yields inched lower across the curve yesterday with economic data being broadly mixed. Headline and core US retail sales advanced 0.3% and 0.4%, beating expectations of -0.2% and 0.2%, indicating consumer resilience. The NY Empire Manufacturing Index print came at 6.6 in June, in contrast to an expectations of a -15.1 print. On the other hand, initial jobless claims for the prior week rose 1k to 262k, well above the 249k forecast. Philadelphia Fed Business Outlook came at -13.7, roughly in-line with the -14 expected print. Market participants continue to expect the Fed to hike rates by 25bp in July with a 72% probability. The peak Fed Funds rate was unchanged at 5.29% for November. Equity indices ended higher with the S&P and Nasdaq up by ~1.2%. US IG and HY CDS spreads tightened 0.6bp and 3.8bp respectively.
The ECB hiked its policy rates by 25bp with its deposit facility rate now at 3.5%, the highest level since 2001. In hawkish comments, it signaled that “stubbornly high inflation all but guaranteed another move next month and likely beyond that too”. ECB said that rising wages could feed into higher prices and warned that it expected inflation “to remain too high for too long”. The ECB is also focused on bringing inflation back to 2% but does not see it at those levels even by 2025. The ECB’s rate hike is in contrast to the US FOMC’s decision to pause a day before. Both Euro-area HICP (Term of the Day, explained below) and US CPI are trending lower and the respective central banks have a similar target of bringing it towards 2%. However, the pace of decrease is slower in Europe and is thus further away from the target as compared to the US (see chart below).
European equity indices closed higher despite the hawkish ECB. European main CDS spreads were 0.5bp wider and Crossover spreads widened 0.8bp. Asia ex-Japan CDS spreads tightened slightly by 0.3bp with Asian equity markets have opened higher this morning.
BOC New York raised $500mn via a 3Y green bond at a yield of 4.714%, 35bp inside initial guidance of T+80bp. The bonds have expected ratings of A1/A/A. Proceeds will be used to finance/refinance eligible green projects as defined in the Bank of China Ltd. sustainability series bonds management statement.
Harmonized Index of Consumer Prices (HICP) is the key metric to measure consumer price inflation in the European Union, by the ECB. It is “harmonised” to ensure that disparate data can be unified thereby ensuring all the countries in the European Union follow the same methodology. This harmonization ensures that the data for one country can be compared with the data for another.
On the Fed Interest Rate Decision for July – former Fed Vice President Richard Clarida
“I do think that if the data is closer to market expectations versus Fed expectations, that they could be done in July…I really think that for the first time in a long time, the Fed is data dependent…they’ll probably get that rate hike in at the July meeting…The Fed has inflation coming down more slowly than a lot of folks, and the Fed also has a smaller rise in unemployment than a lot of people expect.”
On Debt not Being a Concern for Vedanta – CEO of Vedanta Resources Anil Agarwal
“We have less debt. We have better profitability. We are literally lowest cost producer and we produce something there is no competition. We have raised $35 billion…demand is not going to come down. I am very bullish on every commodity.”
On a Structural Shift in Corporate Credit – KKR co-head of credit and markets Christopher Sheldon
“Leveraged credit borrowers have been shifting from leveraged loans to high-yield bonds, or sometimes out of leveraged credit altogether and into private credit…For investors, ABF strategies can provide returns that are generally uncorrelated to either the broader markets or to corporate credit… Our view is you need to start deploying (cash) now because all of a sudden when confidence comes in, it’s going to be like a tinderbox ready to explode…A lot of times, volatility on the way up is so much more vicious.”
On the Impact of Fed’s Hawkish Remarks on Bank Securities – Odeon Capital Analyst Dick Bove
“The outlook for banking remains stressed… real bank equity is headed lower, bank earnings are troubled and the specter of a major increases in loan losses is a real threat…I continue to believe that…debt securities offer some protection in this environment but that bank common equities should be avoided.”
Global High-Yield Default Rate Seen Hitting 5% in 2024: Moody’s