Morning Report

May 23, 2023

“EURUSD continues to decline as the manufacturing sector in Germany experiences a deeper contraction in May. The US May S&P Global PMIs are also due later today, however, investors are expected to pay greater attention to the ongoing debt ceiling negotiations. The positive outlook for a potential US debt-limit agreement is supporting the US Dollar.”

Sam Cornford, Partner – Head of Trading

Main Headlines

President Joe Biden and House Speaker Kevin McCarthy failed to reach an agreement yesterday on raising the US government’s £31.4 trillion debt ceiling, just ten days away from a potential default that could have severe repercussions for the US economy. However, they vowed to continue negotiations. The main point of contention was McCarthy’s insistence on spending cuts in the federal budget, which Biden considers extreme, while the president pushed for new taxes that Republicans have rejected. Despite their differences, both sides emphasized the urgent need for a bipartisan deal to avoid default and indicated ongoing discussions in the coming days.

UK grocery inflation, according to industry data released today, slightly eased for the second consecutive month in May but remained close to record highs. Market researcher Kantar reported a 17.2% annual grocery inflation rate in the four weeks leading to May 14. While this figure decreased from 17.3% in April, it remains one of the highest rates recorded since 2008. Kantar highlighted that UK households could face an additional £833 ($1,051) on their annual shopping bills if they do not adopt cost-cutting measures. The prices of items such as eggs and ambient cooking sauces have seen the most significant increases.


Sterling is weaker than most major currencies in the early morning trade. The International Monetary Fund (IMF) revised its forecasts today, stating that it no longer expects the British economy to experience a recession this year. The IMF upgraded its projections from a contraction of 0.3% to a growth rate of 0.4% for the country’s gross domestic product in 2023. The improved outlook is attributed to the resilience of demand, faster-than-usual wage growth, a decline in soaring energy costs, and the normalization of global supply chains.


Euro is stronger against Sterling and weaker against the Dollar this morning. According to the latest manufacturing activity survey by HCOB, the Eurozone’s manufacturing sector contracted further in May. The Eurozone Manufacturing Purchasing Managers Index (PMI) for May came in at 44.6, lower than the expected 46.2 and the previous figure of 45.8, reaching a three-year low. The bloc’s Services PMI also declined to 55.9 in May, slightly surpassing the consensus of 55.6 but still representing a two-month low compared to April’s 56.2. The HCOB Eurozone PMI Composite dropped to 53.3 in May, missing the expected 53.7 and the previous figure of 54.1, marking a three-month low.


The Dollar is well bid against most major currencies overnight. The US dollar gained momentum for the second consecutive day, reaching a six-month high against the Japanese yen. This rise is driven by expectations that US interest rates will remain elevated for a longer duration, while ongoing debt ceiling negotiations keep investors cautious. Several influential figures from the Federal Reserve hinted at the central bank’s intention to continue tightening monetary policy. Minneapolis Fed President Neel Kashkari suggested that US rates might need to surpass 6% for inflation to return to the Fed’s 2% target, while St. Louis Fed President James Bullard mentioned the possibility of raising rates by another half-point this year.


European stock markets experienced a decline this morning amidst ongoing US debt ceiling negotiations. The region’s benchmark Stoxx 600 index dropped by 0.27% in early trading, with mixed performance across sectors. Household goods saw a 1% decrease, retail fell by 0.5%, while telecoms gained 0.5%. In Asia-Pacific, markets displayed a mixed trend, while US stock futures showed modest gains. Yesterday, the S&P 500 remained relatively unchanged as Wall Street awaited a crucial debt ceiling meeting, with government officials striving to avert a default. The benchmark index marginally increased by 0.02%, closing at 4,192.63.


Main Economic Data/Central Banks/Government (All Times CET)

9:15 a.m.: France May HCOB PMIs
9:15 a.m.: ECB’s Guindos speaks
9:30 a.m.: Germany May HCOB PMIs
10:00 a.m.: Euro-area May HCOB PMIs
10:00 a.m.: Poland April Retail Sales
10:00 a.m.: ECB’s Muller speaks
10:00 a.m.: Norges Bank 2Q Expectations Survey
10:30 a.m.: UK May S&P Global/CIPS PMIs
11:15 a.m.: BOE’s Bailey speaks
12:30 p.m.: Riksbank’s Thedeen speaks
2:00 p.m.: Hungary central bank decision
3:45 p.m.: US May S&P Global PMIs
4:45 p.m.: BOE’s Haskel speaks
5:00 p.m.: ECB’s Villeroy speaks
7:50 p.m.: ECB’s Nagel speaks


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