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US Treasury yields eased by 5-7bp on Tuesday with the 2Y and 10Y now at 4.70% and 3.74% respectively. This comes after hawkish comments from Fed nominees including two current governors who stated that bringing inflation down is their top priority (scroll to Talking Heads for details). On the data front, US housing starts rose to a seasonally adjusted 1.631mn units for May, up from April’s 1.34mn. The 291k increase in starts is the highest since January 1990. Markets continue to price in a 25bp hike in July and expect them to stay at that level till the end of the year, as per CME probabilities. The peak Fed Funds rate moved 1bp higher to 5.31%. US equity indices saw its second consecutive day in the red with the S&P and Nasdaq down 0.47% and 0.16% respectively.
European equity indices closed lower with European main CDS spreads 0.2bp wider. Asia ex-Japan CDS spreads widened by 0.8bp. Asian equity markets have opened mixed this morning.
Moody’s upgrades NVIDIA’s senior unsecured rating to A1; outlook stable
Moody’s upgrades AMD’s senior unsecured rating to A2; outlook stable
Moody’s upgrades Jiaxing City Invs and Dev Group’s rating to Baa2, changes outlook to stable
PacifiCorp Downgraded To ‘BBB+’, Outlook Revised To Negative; Berkshire Hathaway Energy Co. Outlook Also Negative
Exela Technologies Inc. Downgraded To ‘CC’ On Announced Distressed Exchange Offer, Outlook Negative
Western Global Airlines Inc. Ratings Withdrawn Due To A Lack Of Sufficient Information
Common Equity Tier 1 (CET1) Ratio is a financial ratio applicable to banks to measure its core capital as against its Risk Weighted Assets (RWA). Core Capital (CET1 Capital) includes common equity and stock surplus (share premium), retained earnings, statutory reserves, other disclosed free reserves, capital reserves representing surplus arising out of sale proceeds of assets and balance in income statement at the end of the previous financial year. RWAs are calculated to measure the minimum regulatory capital required to be held by banks to maintain solvency. The calculation methodology is such that the riskier the asset, the higher the RWAs and the greater the amount of regulatory capital required. CET1 capital must be at least 4.5% of RWAs according to Basel III.
Contingent Convertible (CoCos) bonds/AT1s commonly have triggers based on CET1 ratios – if the bank’s CET1 ratio falls below a certain threshold, the bonds would convert into equity.
On Fed Nominees’ Take on Inflation
Philip Jefferson, Fed governor and vice chair nominee
“The economy faces multiple challenges, including inflation, banking-sector stress, and geopolitical instability. The Federal Reserve must remain attentive to them all…Inflation has started to abate, and I remain focused on returning it to our 2% target.”
Lisa Cook, Fed governor
“…elevated inflation is a grave threat to sustaining the expansion of the American economy…if confirmed, I will stay focused on inflation until our job is done.”
Adriana Kugler, World Bank’s US representative and Fed Board nominee
“My personal and professional experience guides my understanding that high inflation hurts workers and businesses alike, and I believe that it is important to bring inflation down to the Fed’s 2 percent target in order to set a strong foundation to build an economy that supports all Americans.”
On the Attractiveness of Asian Bonds
Fiona Lim, senior FX strategist at Maybank
“Asia ex-China (bonds) could benefit as the Fed approaches the end of its tightening cycle, notwithstanding residual uncertainty on the terminal rate…This is especially in light of an arguably resilient macro backdrop where services sectors continue to hold up in most countries.”
Khoon Goh, head of Asia Research at ANZ
The Bank of Korea is perceived to be mulling potential rate cuts towards the end of the year, boosting the appeal for their bonds.
On the Sustainability of the US Stock Market Rally
Scott Chronert, global markets strategist at Citigroup
“The issue is going to be: to what degree does (the AI frenzy) show up in fundamentals?”
Lisa Shalett, CIO at Morgan Stanley
“Our skepticism around the sustainability of the rally in US market-cap weighted indexes stems primarily from continued investor belief that the Fed is bluffing on holding rates higher for longer… If a favorable soft landing does materialize, the Fed will have no incentive to cut rates, especially if labor markets are still relatively resilient…Watch real rates, which would likely creep higher amid a strong economic soft landing.”
Mike O’Rourke, chief market strategist at JonesTrading
“Generally speaking a high-multiple environment is only accompanied by a declining policy rate when earnings have collapsed…It will take a reality check in equities along with economic headwinds before rate cuts emerge. High stock multiples and a high policy interest rate are not a relationship that can be sustained in the long term.”