[1/2] Visitors walk in U.S. Capitol Square amid ongoing negotiations for a deal to raise the United States’ debt ceiling and avoid a catastrophic default in Washington, U.S., May 24, 2023. REUTERS/Jonathan Ernst
A look ahead for the day ahead in the US and global markets by Mike Dolan
Out of the frying pan and into the fire?
Relief over the likely lifting of the US debt ceiling this week is being held back by the uncomfortable prospect of even higher Federal Reserve interest rates – and the further fading of any hopes of easing in 2023.
With US markets reopening after Monday’s bank holiday, investors must now weigh the likelihood that both houses of Congress will vote to raise the US debt ceiling this week after the White House and Republican leaders finally broker a deal , before the Treasury runs out of money ahead of a new Deadline: June 5.
While the extreme wings of both parties have expressed concern over the details of the deal, the market expects the moderates to push it through by Friday. The Treasury then sells up to $1 trillion of new debt by the end of the year to replenish its coffers — something that could create volatility in the billing market as cash management strategies restructure.
However, with some US inflation indicators proving firmer than many were forecasting and the May jobless report due on Friday, expectations are growing that the Fed will hike rates again next month – and rates may end the year no lower than now.
Futures markets now see a 60 percent chance that the Fed will hike rates another quarter point to the 5.25 to 5.50 percent range at its June 14 meeting. And while such an increase could be reversed by year-end, the Fed’s implied policy rate is less than 10 basis points lower by the end of 2023 than it is now.
Although largely illiquid outside US bourses, one-month Treasury yields were about 10 basis points higher than Friday’s close.
As the debt deal will further tighten fiscal policy and fears of interest rate cuts and defaults recede, yields on 2- and 10-year US Treasury bonds fell about 5 basis points on Tuesday from Friday’s close. Credit default swaps for US government bonds also declined slightly.
The dollar between the Bank of Japan and Treasury officials created some late volatility there.
US stock futures were up about 0.5%, partly due to relief from the debt deal – although last month there was little disruption to stock indices in contrast to the recent major debt ceiling standoff in 2011 gave.
Tech and AI speculation has been a bigger factor, with earnings from the likes of Nvidia and Marvell pushing both stocks up more than 20% over the past week.
Elsewhere, stocks in Asia and Europe edged higher. Weekend news of snap general elections in Spain later this year was partially offset by encouraging inflation news early Tuesday.
Spanish inflation slowed to 3.2% yoy in May – down from 4.1% in April and well below economists’ expectations for a decline to 3.5%.
Oil prices also fell, with the year-over-year decline in Brent crude prices now standing at nearly 38% — the biggest annual drop since 2020.
Turkey’s battered lira hit another record low on Tuesday — a fall of more than 2% since President Tayyip Erdogan was re-elected in Sunday’s election amid fears his increasingly authoritarian rule and unorthodox economic policies will continue to erode the currency .
Events to watch out for later on Tuesday:
* US consumer confidence in May, Dallas Fed manufacturing survey in May, house prices in March, home price buying index in Q1
* The House Rules Committee is taking up the proposed debt ceiling bill, a necessary step before a full vote in the House of Representatives
* Thomas Barkin, President of the Richmond Federal Reserve, speaks
* The US Treasury is auctioning 3-month and 6-month notes
* US Corporate Earnings: HP
consumer confidence. Payroll accounting outside of agriculture
By Mike Dolan, edited by Susan Fenton [email protected]. Twitter: @reutersMikeD
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