Saxo Spotlight: Liquidity risks from US debt ceiling deal, Nvidia and China big tech earnings – May 22-26

US debt ceiling talks bring volatility and liquidity drainage risks

Treasury Secretary Yellen told lawmakers that the Treasury would be running a cash balance below the minimum (generally considered as USD30 billion) by early June (can be as soon as June 1) and would be at risk of default. If there is no resolution to raise the debt ceiling towards the end of May, markets will be rattled. If 2011 is any guide, equities markets could be sold off significantly and bond yield rose as investors turn into a risk-off mode and recession fear escalates. The market so far is pricing in a resolution and a default will be avoided. However, even if that is the case, asset markets are still likely to be volatile after the debt ceiling is raised. It is because there will be a large liquidity drain from the economy as the Treasury replenishes its cash balances held at the Federal Reserve from the then USD30 billion or so to the normal level of USD550 to USD600 billion within a short period of time. When the Treasury issues T-bills and deposits the proceeds to the Fed, the banking system’s excess reverse falls and it drains liquidity from the financial system. This could be negative for risk assets such as equities and credit.

US: PCE and FOMC minutes to continue the Goldilocks

Market is likely to remain focused on the debt ceiling drama this week, and economic data will therefore take a back seat unless the message is loud and clear. After firm retail sales and lower-than-expected jobless claims last week continuing the Goldilocks, this week’s data will hardly be any different. The Fed’s preferred inflation gauge, PCE, is out for April on Friday and expected to show that inflationary pressures remain firm. Bloomberg consensus expects core PCE to remain unchanged at 4.6% YoY and 0.3% MoM in April. A second revision of the Q1 GDP is also scheduled for release on Thursday. Ahead of that, the FOMC minutes from the May meeting will be released on Wednesday, and strength of the pause signal for June as well as views around the debt ceiling concerns and banking crisis will be key to watch. However, with Powell having re-confirmed his inclination for a pause on Friday against Logan and Bullard’s hawkish signals last week, the minutes will now look stale.

UK: Softer inflation could tilt the next BOE meeting to a pause

UK’s April CPI is due to be released on Wednesday and the headline print is finally expected to bid goodbye to double-digit prints that were seen consecutively for the last seven months. Bloomberg consensus expects headline CPI to cool to 8.2% YoY from 10.1% YoY in March, but the core still remaining firm at 6.2% YoY. A lot of the slowdown will likely be driven by base effects, as massive surge in household energy bills from last year is lapped. But it will be more important to watch the strength of the services inflation print to indicate any clear shift in BOE expectations for the June meeting. For now, a 25bps rate hike is priced in with 76% probability. Retail sales will also be out on Friday and shed further light on the consumer after a depressed March print suggested inflation may be straining the consumers.

Japan: Tokyo CPI is unlikely to spell any respite

Japanese equities have been outperforming the S&P 500 and other Asian markets solidly this year, and one of the reasons underpinning that is the return of inflation. Further evidence of that will be out this week when Tokyo CPI for May is released, where Bloomberg consensus expects a firm print of 3.4% for the headline (vs. 3.5% in April) and 3.9% for the core (vs. 3.8%). This would likely affirm that nationwide CPI for May could see further strength, creating some more pressure on the Bank of Japan to remove some easing, but they have emphasised that they will wait for firmer wage pressures. A higher-than-expected print could see further expectations of BOJ tightening, bringing JPY gains but debt ceiling talks hold a bigger say in the path of yen this week.

New Zealand: Tough decision ahead for RBNZ

New Zealand’s inflation expectations for Q2 came in much lighter than Q1, and fell back in the forecast range of 1-3%. This started to build the case for a pause from the Reserve bank of New Zealand, but the latest budget update have again tipped the odds in favour of a rate hike at this Wednesday’s meeting. The budget announcement last week indicated higher fiscal spending on reconstruction to boost growth and the Treasury expecting that the economy can avoid a recession. That means the central bank still has room to tighten policy, although statement may start to indicate that a pause is likely ahead. NZDUSD has been stuck in a range around 0.62 since March and a break below 200DMA at 0.6157 could trigger a deeper pullback.

Nvidia, Lowe’s, and discount stores are the focus of US earnings

The most monitored results announcement in the U.S. market will be from NVidia on Wednesday. The chipmaker’s share price jumped 114% and was the biggest winner within the S&P 500 in 2023. Investors had high expectations of the company’s advantageous position in the rapid development in AI and the resulting demand for computing power. With home improvement giant Lowe’s and discount retailers Costco, Best Buy, and Dollar Tree reporting, investors could have a better gauge about the purchasing power of U.S. consumers.

Meituan expected to deliver stellar Q1 results with robust revenue growth and profit turnaround

Earnings flow from Chinese big tech stocks this week, commencing with Kuaishou on Monday, followed by Xiaomi on Wednesday, and concluding with Meituan on Thursday. Notably, market attention will be primarily directed towards Meituan, as it prepares to unveil its financial results on Thursday. According to Bloomberg consensus, expectations are high for Meituan, with a projected 24% year-on-year surge in Q1 revenues, totalling RMB57.5 billion. In addition, the company's non-GAAP net profit is anticipated to soar to RMB1.9 billion, a remarkable turnaround from the RMB3.6 billion loss reported in the corresponding period last year. These impressive gains are forecasted to stem from solid growth in food delivery order volume, registering low-double-digit expansion, as well as substantial margin improvement within this sector. Furthermore, an upward trajectory is anticipated in in-store service revenue, with a projected year-on-year increase exceeding 20%, propelled by heightened demand for in-person services subsequent to the easing of Covid restrictions.

Earnings this week:

• Monday 22 May: ZOOM, Kuaishou
• Tuesday 23 May: Lowe’s, Kingsoft
• Wednesday 24 May: Xiaomi, XPeng, Lenovo
• Thursday 25 May: Costco, Dollar Tree, Best Buy, Gap, Meituan, NetEase

Key economic events this week:

Monday 22 May

• China 1Y and 5Y Loan Prime Rate (May)
• Hong Kong Inflation (Apr)
• Eurozone Consumer Confidence (May, flash)

Tuesday 23 May

• UK S&P Global/CIPS Flash PMI, Manufacturing & Services
• Eurozone Flash PMI, Manufacturing & Services
• US S&P Global Flash PMI, Manufacturing & Services
• Singapore CPI (Apr)
• United States New Home Sales (Apr)
• United States Building Permits (Apr)

Wednesday 24 May

• New Zealand RBNZ Official Cash Rate (May)
• United Kingdom Inflation (Apr)
• Germany Ifo Business Climate (May)
• United States Fed FOMC Minutes (May)

Thursday 25 May

• Germany GDP (Q1, final)
• United States GDP (Q1, 2nd est.)
• United States Initial Jobless Claims (May 20)
• United States Pending Home Sales (Apr)

Friday 26 May

• Japan Tokyo CPI (May)
• Australia Retail Sales (Apr, prelim)
• United Kingdom Retail Sales (Apr)
• United States Personal Income and Consumption (Apr)
• United States Core PCE Price Index (Apr)
• United States UoM Sentiment (May, final)