Market Engine: Data from China, the ISM, and the Risks of a Liquidity Crisis in the United States

Market Engine: Data from China, the ISM, and the Risks of a Liquidity Crisis in the United States

Next week will be a turbulent economic week, marked by a transitional period. Mainly attention will be paid to some macro data which will mainly come from China. Given the negative indications from the recent data, doubts started in the market about the strength of the recovery of the second largest economy in the world. Wednesday begins with the publication of Dragon’s Trade Balance for May, which is expected to be clearly in surplus. More important will be Friday’s inflation data. Confirmation of a level close to zero, which was seen recently, should increase expectations of new stimulus measures by Pboc. Also follow the German Trade Balance on Monday. In the US, the most important data to watch will be, again on Monday, ISM Services, which is expected to show a slight improvement in May compared to the previous month.
Also to be watched, is the strong liquidity drain that the US Treasury will begin to implement in the United States, after agreeing to raise the debt ceiling. In practice, the Treasury to replenish its treasury account near zero due to the protracted debt ceiling negotiations will now start a strong influx of treasury issues. This disbursement, after the agreement, will begin on Monday, and is supposed to ramp up in the second part of June, when the impact of fiscal deadlines will be added to the influx of short-term government issues. On the central bank front, the week will be full of meetings with interventions from monetary authorities in Australia, Canada, India and Poland. All of these institutes must keep interest rates unchanged, and the RBA meeting, which surprised the markets last month with an increase of 25 basis points, will be of particular importance. Finally, today’s OPEC + meeting should be watched, as the market does not expect new cuts, even if the recent drop in oil prices increases the chances of an internal discussion about this option, especially between the two main exporters, Saudi Arabia and Russia.
“The most important event this week – comments Antonio Cezarano, chief global strategist at Intermonte – will be the verification of any initial effects of a liquidity drain by the US Treasury in the US. The biggest impact should appear in the second part of June and could also affect the region Euro Due to the expiration of €477 billion of Tltro at the end of the month, the European Central Bank’s refinancing operations aimed at providing liquidity to banks.The first week of June – Cesarano adds – could be more choppy and volatile than the previous week. I expect profit-taking in Equity markets especially in the second half of June, when the aforementioned drain on liquidity becomes more severe, also due to the US tax deadlines of June 15th, and Eurozone LTTROs and T-bills aimed at replenishing the US Treasury account, which is almost at zero. Before getting to the heart of the potential exchange effect – the analyst continues his reasoning – there could still be in part the long-term effect of the trend in US technological measures led by artificial intelligence, in light of Apple’s developer conference from June 5 to 9, which, as indeed happened With Google products, you may announce new products related to artificial intelligence. Especially after Nvidia, AI has made a contagious effect on the markets. A race to buy AI-related securities has begun. The initial euphoria in the face of new trends has already occurred. In this case, once the excesses are also mitigated due to the interim phase of liquidity drain, it is possible that the trend will continue, given the potential wide uses of AI. Of course, there are also potential risks associated on the one hand with ethical implications and on the other hand with the smoothness of the supply chain for silicon wafers from Taiwan, which are needed to produce high-performance chips. And now, as Senate leader Chuck Schumer said, Americans will be allowed to “see the risk of default in the rear-view mirror,” another problem remains on the table: liquidity draining. Until the end of reaching an agreement – explains Cesarano – is linked to the other fact that until now, the Treasury Department, for at least a year since the midterm elections, in the absence of the possibility of raising the cap, lowering debt issues, and to pay the public accounts, has drawn ‘from savings’ ”, resorting mainly to the state’s current account, into which tax revenues flow, which have practically dried up. Only about $40 billion remains available, compared to last year’s average of $600-650 billion. This means that the account needs to be replenished and that now, thanks to the raising of the debt ceiling, it will be possible to resort to debt cases again. However, the danger is that after this drought, the flood will arrive, that is, the drainage effect caused by short-term securities issues will be very large compared to the time period in which it occurs. From Monday, after Biden’s signature, the Treasury Department will issue treasury bills, that is, short-term bonds, 3- and 6-month bonds, in the rain. In practice, there will be a strong drain on liquidity, close to the June 15 fiscal deadline, which in turn will drain more money from the market into state coffers. Depletion means that the state absorbs it instead of injecting liquidity into the markets through public spending. And what are the risks? That the US financial markets may find themselves lacking in liquidity, which represents a danger, especially to the system of regional banks, which have previously given several indications of a liquidity crisis.

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Another effect of the drain is the increase in the price of short-term bonds. The 6-month Treasury yield rose to 5.5%, the 3-month yield 5.4% and the 2-year yield also continued to rise over the 10-year period: 4.6% versus 3.37%. These moves on the bond front widened the spreads between the US and Germany, driving up the value of the dollar. “Going forward – explains Cesarano – this trend will tend to strengthen, as the drainage grows in June, and it will take hold.”

– In the US pay attention to ISM services
Inflation has improved in the eurozone thanks to lower energy prices. Core inflation, which is most worrying, fell in May, especially in Germany, Spain and France, and less so in Italy, where services and food ingredients, which are difficult to refrigerate, are more important. However, Christine Lagarde insists that European inflation “remains high” and that “more needs to be done” to reduce it, which means that the ECB will certainly raise interest rates twice more in June and July, while reserving the right to decide in September on basis for future data. Even in the US, data on the labor market performed well last Friday. “The US job market is still strong, thanks to the momentum of services, while manufacturing already appears to be in the doldrums. However, services weigh two-thirds of the economy, so it counts more than manufacturing,” Cesarano said. Next week, watch the data from ISM Servizi, and it is expected to show a slight improvement in May compared to the previous month. “If the number is much higher than expected, it could fuel fears of a more aggressive Fed. Conversely, a lower than expected number should mitigate these concerns but could reopen fears of a recession on the horizon.” Short-term “. The Fed is preparing for a pause to reflect on interest rates for the month of June. the reason? “The official version – explains Cesarano – is that we do this so that we have other data that we can better decide later. However, I think another factor also contributes: at this stage of draining liquidity, if you raise interest rates by increasing yields on bonds Treasury, you risk pushing depositors further to leave their deposits to buy treasury bills, which creates tension and thus problems for banks, particularly regional ones.” – OPEC+ meetings, no production fees
OPEC + meets today in the stage of falling oil prices. However, we don’t expect major surprises, i.e. there shouldn’t be any new production cuts on the horizon. The important thing is to understand the tones spoken by the “big names” in the sector, especially Saudi Arabia and Russia, which are not the same at this stage. The problem, Cesarano explains, is that they agreed to cutbacks and subsidize prices. Saudi Arabia does it and Russia prefers instead to sell more and do whatever it likes with production cuts. Hence the friction between the two.”
China: The recovery is losing its moment
There are many Chinese data to watch this week. Monday starts with Caixin Services. Then, on Wednesday, we continue to publish the trade balance for the month of May, which is expected to be clearly in excess. More important will be Friday’s inflation data. Confirmation of a near-zero level, seen recently, would raise expectations about new stimulus measures by the People’s Bank of China. In China, the recovery appears to have lost momentum. Data on manufacturing activity in May was mixed. The manufacturing PMI, which is calculated by the Office for National Statistics, fell to 48.8 points from 49.2 in April, the lowest in five months. The Caixin Index, a specially calculated one that takes more into account small and medium-sized enterprises, instead records different data and shows an expansion of 50.9 points in the industry in May. However, according to Bloomberg, the Beijing government is ready to launch stimulus measures for the real estate sector, which has been in crisis for some time and is an important “engine” for the growth of the dragon economy. This was enough to change the mood of the Chinese financial markets, with the rise of the Shanghai and Hong Kong stock exchanges again, due to expectations that the arrival of stimuli in the real estate sector may be sufficient to resume consumption and investments. – BTP VALORE is trading in Italy
It should be noted the first appearance in Italy, next week, of Btp Valore in Italy. It’s a tool designed by the Treasury for the retail market, ie mainly for small individual savers, and for debt stabilization, in the context that we have upward revisions of our GDP, about 1% in 2023, thanks to lower gas prices and a good start in the first quarter. The two minimum coupons of the value of the BTP, which can be adjusted upwards, will be 3.25% for the first 2 years and 4% for the next 2 years, to which will be added a loyalty bonus of 0.5%, for those who hold the billing locker for 4 years and thus until the due date, which, given the circumstances Currently, it represents an advantage of about 0.25% over a normal 4-year Btp purchase. It will be important to understand how much this new product takes off, to understand how solvable Italy is internally. Today, about 9% of the Italian public debt is in retail hands. If this product does well, it will exceed that quota and thus start going into double digits. (AGI)
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