US debt ceiling deal reached

A deal has been reached on the US debt ceiling issue, which has driven uncertainty in US and global markets for several weeks. The in-principle agreement was reached on Saturday night and will see the debt limit of USD 31.4tn raised for two years, but will include caps on government spending in the period, which extends until after the next election. There were compromises on both sides after weeks of negotiations: the Democrats have compromised on the Republican demand to increase work requirements for recipients of the food stamps welfare programme, although there are carve-outs for the homeless and veterans. Non-defence spending will rise by 1% in 2025 after staying roughly flat next year, while Republicans had pushed for deeper cuts.

US spending and inflation data surprised to the upside in April data released on Friday, keeping the chance of a further rate hike by the FOMC in play, especially on the back of hawkish messaging from a number of Fed officials in recent weeks. Personal spending, adjusted for inflation, expanded 0.5% m/m, compared with a consensus prediction of 0.3% and flat growth the previous month. With US consumers still spending, price pressures remain elevated, and core PCE was up 0.4% m/m and 4.7% y/y, above expectations of 0.3% and 4.6%. This was the biggest monthly gain in the Fed’s preferred inflation measure since the start of the year. There was some positive news for the Fed on Friday as the University of Michigan consumer sentiment index showed that inflation expectations were at 3.1% over the coming five to 10 years, down modestly from the 3.2% on the initial reading – though this was itself a 12-year high.

In other data out Friday, durable goods orders surprised to the upside as they expanded 1.1% m/m, where expectations had been for a 1.0% drop. Stripping out transport however, orders were down 0.2%, suggesting high interest rates are starting to impact capital expenditure, with potential implications for growth in the coming quarters.

UK retail sales surprised to the upside on the headline reading for April, expanding 0.5% m/m, compared with consensus predictions of a 0.3% gain. This was an improvement on the 1.2% contraction in March as well, revised down from the initial reading of 0.9%. Sales were 3.0% lower than a year earlier. Stripping out auto fuel, the upside surprise was even greater as sales expanded 0.8% m/m, double the predicted 0.4%. A boost to benefit payments in April likely supported the gain in sales, but with inflation still high and further rate hikes on the cards, the strength of the UK consumer will continue to be tested.

Saudi Arabia’s M3 money supply rose 9.5% y/y in April, a modest slowdown from the 10.0% gain seen in March. Net foreign assets dipped from SAR 1.572tn in March to SAR 1.538 last month.

In Turkey, incumbent President Recep Tayyip Erdogan has secured victory in the second-round run-off vote yesterday, winning 52.2% of the vote with most counting done.

The World Bank will provide Lebanon with USD 300mn which will extend the support package provided to 160,000 poor households for a further two years. The economic and financial meltdown in Lebanon over the past three years has pushed much of the population into poverty, with no tangible progress on essential reforms needed to unlock multilateral and partner support yet realised.

Today’s Economic Data and Events

• 18:00 US conference board consumer confidence index, May. Forecast: 99.9

Fixed Income

• US Treasuries fell throughout last week as the persistence of price pressures outweighed concern over the debt ceiling and the threat to growth. A hotter than anticipated PCE print on Friday helped push yields higher with the 2yr UST up 3bps at 4.5619%, taking the weekly move to a gain of almost 30bps on the 2yr yield. The 10yr UST yield settled slightly lower on Friday but was still up about 13bps for the week as a whole at 3.7893%.
• Markets are now pricing in a greater than 50% chance of a rate hike at the June FOMC (June 14) which would bring the top end of the Fed funds to 5.5%. At least one full 25bps hike is priced in over the next two meetings.
• S&P affirmed their sovereign rating on Bahrain at ‘B+’ with a positive outlook. Both Moody’s and Fitch have Bahrain on a stable outlook.

FX

• It was a quiet end to the week for currency markets leading into public holidays in many developed markets to start the trading week. The dollar index fell marginally though was still up nearly 1% for the week as a whole. EURUSD closed near flat at 1.0723 though was down about 0.8% for the week as a whole while GBPUSD dropped 0.8% last week to 1.2344 on Friday. USDJPY rose by nearly 1.9% to 140.60, holding above 140 for the first time since November last year.
• In commodity currencies NZDUSD was the standout loser, falling 3.7% last week to 0.6051 as the RBNZ signalled it was done its rate hiking cycle. AUDUSD fell 2% over the week though managed a gain of 0.2% on Friday to settle at 0.6517. USDCAD closed higher by 0.8% at 1.3615.

Equities

• Uncertainty stemming from the US around the debt ceiling, alongside ongoing concerns about the strength of the global and local economies, weighed heavily on equity markets around the world last week, with most major indices closing lower.
• In Japan, the blue chip Nikkei index was an outlier as it added 0.6% w/w but this was driven by a weakening yen. The wider based Topix ended down 0.6% w/w, while elsewhere in Asia the Shanghai Composite dropped 2.1% w/w and the Hang Seng ended the week 4.4% lower.
• In Europe, the FTSE 100, the DAX, and the CAC dropped 1.7%, 1.8% and 2.3% w/w respectively. In the US, the NASDAQ fared better over the week than its peers as it benefitted from Nvidia’s remarkable gains. It ended the week up 2.5%, while the S&P 500 gained 0.3% w/w after a rebound on Friday. The Dow Jones also saw gains on Friday, but this was insufficient to offset earlier losses and the index ended down 1.0% w/w.
• Locally, the DFM lost 0.1% w/w and the ADX 0.3%. In Saudi Arabia the Tadawul ended the week 1.4% lower while Turkey’s Borsa Istanbul ended up 1.8% after strong gains on Friday.

Commodities

• Oil prices finished the week quietly higher. Brent futures added 1.8% last week to close at USD 76.95/b while WTI added almost 1.6% to USD 72.67/b. the prospect of a positive resolution to the debt ceiling fight in the US should help to spur on some risk appetite while markets will be looking ahead to the next OPEC+ meeting in early June. The meeting is likely to be live as Saudi Arabia may lean toward supporting another output cut, or at least spreading the cut across all members of the producers’ alliance.