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MARKET WRAPS

Watch For:

Germany labor market statistics, CPI data for Germany, North Rhine Westphalia, Brandenburg, Hesse, Bavaria, Baden-Wuerttemberg, Saxony; France household consumption expenditure in manufactured goods, provisional CPI, PPI, GDP detailed figures, housing starts; Italy GDP, provisional CPI, cities CPI, Bank of Italy Annual Report presentation; UK CBI Growth Indicator Survey; no major corporate updates expected

Opening Call:

Stock futures point to declines in Europe following weak China PMI data earlier today, while focus also remains on developments in the implementation of the U.S. debt deal. In Asia, stock benchmarks fell; the dollar rose; Treasury yields were mixed; and oil and gold futures fell.

Equities:

European shares look set to decline at Wednesday's open, as investors wait to see if the tentative debt deal struck over the weekend can be implemented by June 5, after which Treasury Secretary Janet Yellen said the U.S. would be unable to pay all of its bills on time.

Data earlier today showing weakening manufacturing activity in China could also weigh on sentiment. China's official manufacturing purchasing managers index fell to 48.8 in May, dropping deeper into contraction in May, signaling further cooling of momentum in the postpandemic recovery.

A U.S. default could wreak chaos on the market, so Ed Mills, Washington policy analyst at Raymond James, says the bill in all likelihood will be passed. "Because the alternative is so bad, we continue to believe members who are undecided will be there and vote for this to get it across the finish line," he said.

But averting default is hardly the end of the story, he added. "Equally important is the contents of the deal and the market implications" and that's where the headwinds may emerge for investors, he said.

There's a glut of Treasury bills that will flood the market in the wake of an enacted debt ceiling deal, Mills noted. The issuance could be around $1 trillion through August, according to BofA Global strategists. "Who buys that?" Mills said -- and what are the equity market implications if the money destined for stocks is going to Treasury debt instead, he added.

The debt ceiling implications are not the only concerns for traders, noted Padhraic Garvey, regional head of research in Americas at ING. Investors are also worried about inflation, as the PCE index data released last week looked "uncomfortably high" and that might prompt the Federal Reserve to raise its key interest rate again, Garvey said.

Traders are now anticipating another Fed rate hike in June. Fed funds rate traders are pricing in a 62% chance of another 25 basis point increase, according to the CME FedWatch tool. That's up from a 28% chance one week earlier, with the backdrop of Fed speak hints at a pause.

Thomas Barkin, chief of the Richmond Federal Reserve, said Tuesday that high inflation probably won't dissipate quickly barring a sharper slowdown in the U.S. economy.

"[Inflation] is going to be more stubborn than many people would hope," Barkin said.

Forex:

The dollar strengthened in Asia amid risk-off sentiment, partly driven by worse-than-expected Chinese official manufacturing PMI data earlier today, which also weighed on the yuan.

China's May PMIs could add to the recent run of weak economic data and trigger another selloff in CNH today, said Kristina Clifton, senior economist and senior currency strategist at CBA, in a report before the PMI release.

Bonds:

Treasury yields were mixed early Wednesday after falling overnight amid easing concerns over a possible technical U.S. default, even though signs of sticky inflation still left traders pricing in a likely interest-rate hike by the Fed next month.

Michael Arone, chief investment officer at State Street Global Advisors, said the primary driver of falling short-term yields was that progress has been made on a debt-ceiling resolution and relief that a technical default may not happen.

"The thing that we've seen most evident in markets is that anything that was going to mature in early June, folks had been rotating out of it [one-month T-bills] and lengthening the maturity schedule, because there was this belief that default would be avoided and they [investors] just didn't want to take any of the risks in the short term as we approach the so-called X-date," Arone said.

Andrew Hollenhorst, chief U.S. economist at Citi, said his team expects a House vote after markets close Wednesday night and the Senate to pass the bill over the weekend.

"Some progressive Democrats and conservative Republicans have signaled they will vote against the bill, but leadership will have expected to lose those votes," Hollenhorst said.

The moves were helping suppress yields across the curve after they jumped on Friday in the wake of the PCE inflation report for April which suggested price pressures remained stubbornly high.

Investors consequently bet that the Fed will soon tighten monetary policy further.

Energy:

Oil futures fell early Wednesday after China's official manufacturing activity gauge fell deeper into contraction, signaling a further cooling of the country's postpandemic recovery momentum.

"Oil prices year-to-date continue to gyrate with macro concerns and recessionary fears, diverging often from underlying fundamentals that are slowly pivoting towards the deficits that we - and consensus - expect in 2H23," Goldman Sachs said.

Production cuts announced by OPEC and its allies have had limited impact on prices, but traders will be watching closely ahead of the next meeting of the cartel of oil exporters, set for this coming weekend.

The OPEC+ meeting on June 4 should be "pivotal," said Louis Navellier, chief investment officer at Navellier Calculated Investing.

He pointed out that tensions have been rising between Russia and Saudi Arabia, with Russia "pumping increasing volumes of cheap heavy crude oil onto world markets, which has been undermining Saudi Arabia's efforts to boost prices."

Traders are on guard after a top Saudi official said last week that short sellers had better "watch out," with some analysts seeing the warning as a suggestion that OPEC+ may decide to reduce production at its meeting Sunday.

Metals:

Gold futures fell slightly in Asia, as investors focused on the U.S. debt-ceiling deal facing its crucial first test in the GOP-led House.

If the U.S. default risk is erased, "gold could start stabilizing here even as the market becomes more convinced that the Fed has one more rate hike in them," said Edward Moya, senior market analyst at Oanda.

However, "if the economy proves to be too resilient and the risk of two hikes grows, that could limit gold's gains," he added.

Copper prices fell, pulling back from earlier gains amid broad losses in the commodities markets as investors await a vote on the U.S. debt-ceiling deal.

Galaxy Futures said the base metal will likely remain under pressure in the near term, as global inventories have been tracking higher in a sign of soft demand, while a looming global recession clouds the demand outlook further.

Even though the commodity's recent downturn has likely priced in some negative factors, Galaxy warned of limited rebound momentum from current levels.

Iron ore prices fell sharply in China amid broad weakness in regional markets after the country's latest PMI data missed market expectations.

Galaxy Futures said iron ore buying interest at Chinese steel producers remains muted, as real-estate construction activities lack a meaningful rebound.

TODAY'S TOP HEADLINES

China May Official Manufacturing PMI Slides Further Into Contraction

The official gauge of China's manufacturing activity fell deeper into contraction in May, signaling further cooling of momentum in the postpandemic recovery.

China's official manufacturing purchasing managers index fell to 48.8 in May, from 49.2 in April, the National Bureau of Statistics said Wednesday.

Fed's Barkin says inflation will be 'more stubborn than many people would hope'

The chief of The Richmond Federal Reserve said Tuesday that high inflation probably won't dissipate quickly barring a sharper slowdown in the U.S. economy.

Thomas Barkin said businesses are inclined to keep raising prices so long as there's strong demand among customers. Demand would have to slow markedly to get businesses to back off, he said.

Debt-Ceiling Bill Faces Test as Some GOP Critics Vent

WASHINGTON-House Republican leaders projected confidence Tuesday that the debt-ceiling deal struck with President Biden would draw enough support to pass, while some conservative lawmakers angrily denounced the agreement.

The bill advanced past a closely watched procedural hurdle in the Rules Committee late Tuesday, and a final House vote is expected as soon as Wednesday night. While the bill appears on track to gain sufficient Republican and Democratic votes to pass the House and then the Senate by the June 5 deadline, it could still run into procedural obstacles, complicating the race to avoid an unprecedented default. Roughly 30 House Republicans announced Tuesday they would oppose the bill, with others saying they were undecided.

The Exclusive $1 Trillion Club: See the List

Chip maker Nvidia hit a market capitalization of $1 trillion in intraday trading, briefly making it part of an elite club of companies, but closed below the mark Tuesday.

The Santa Clara, Calif.-based company makes chips used in PCs, cars and robots, but its recent success with artificial-intelligence programs has propelled the company to new heights. It closed Tuesday with a market cap of $990.74 billion.

Ukraine and Allies Plan Peace Summit Without Russia

KYIV, Ukraine-Ukraine and its allies are planning a summit of global leaders that would exclude Russia, aimed at garnering support for Kyiv's terms for ending the war, according to a senior Ukrainian presidential adviser and European diplomats.

Plans for a gathering, while preliminary, have strong support from European leaders including French President Emmanuel Macron who are lobbying for participation by countries that have sided with Russia or declined to take a position on the war.

Nestle Names New CFO

Nestle appointed Anna Manz from the London Stock Exchange Group to succeed Francois-Xavier Roger as chief financial officer after he decided to step down in pursuit of new professional challenges.

The Swiss packaged-foods giant said Tuesday that Manz would take over as soon as she is released from her present duties as chief financial officer and board member at the London Stock Exchange Group. Roger will remain in place until then, Nestle said.

Write to singaporeeditors@dowjones.com

Expected Major Events for Wednesday

04:30/NED: Apr Retail turnover

05:00/FIN: 1Q GDP

05:30/GER: May North Rhine Westphalia CPI

05:30/IRL: May Monthly Unemployment

06:00/GER: Apr Foreign trade price indices

06:00/DEN: 1Q Preliminary GDP

06:00/DEN: Apr Unemployment

06:00/NOR: 1Q Credit Indicator C3

06:30/HUN: Apr PPI

06:30/SWI: Apr Retail Sales

06:45/FRA: Apr Household consumption expenditure in manufactured goods

06:45/FRA: Apr PPI

06:45/FRA: May Provisional CPI

06:45/FRA: 1Q GDP - detailed figures

06:45/FRA: Apr Housing starts

07:00/TUR: 1Q GDP

07:30/EU: May EuroCOIN indicator of euro area economic activity

07:55/GER: May Labour market statistics (incl unemployment)

08:00/GER: May Bavaria CPI

08:00/GER: May Hesse CPI

08:00/GER: May Baden-Wuerttemberg CPI

08:00/GER: May Brandenburg CPI

08:00/POL: 1Q GDP

08:00/ICE: 1Q GDP

08:00/ITA: 1Q GDP

09:00/GER: May Saxony CPI

09:00/MLT: Apr PPI

09:00/BEL: 1Q Final GDP

09:00/CYP: Apr PPI

09:00/GRE: Mar Turnover Index in Retail Trade

09:00/ITA: May Provisional CPI

09:00/ITA: May Cities CPI

09:00/LUX: Apr PPI

10:00/POR: 1Q GDP

12:00/GER: May Provisional CPI

15:59/UKR: Apr Industrial Production

16:59/SPN: Apr Budget deficit

16:59/BEL: Apr PPI

16:59/SPN: Mar Monthly Balance of Payments

19:31/IRL: May Ireland Manufacturing PMI

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(END) Dow Jones Newswires

May 31, 2023 00:27 ET (04:27 GMT)

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