Debt ceiling resolution could be nearing

A resolution to the US debt ceiling impasse looks to be nearing with the outline of a deal emerging overnight. The ceiling could reportedly be raised for two years along with a cap on overall government spending. Defence spending would still be permitted to increase next year. However, a full deal has still not been reached with Moody’s raising the pressure on the US, saying that if the government missed an interest payment in mid-June then the US would be at risk of losing its AAA rating.

Turkey’s central bank left the one-week repo rate at 8.5%, the level it has held since cutting rates by 50bps in February. According to the MPC statement, rates are at levels “adequate to support the necessary recovery” in Turkey’s economy following an earthquake that affected the south-eastern parts of the country in February. Markets had generally expected rates to remain on hold and reaction in currency markets was limited. More focus will be on the upcoming second-round of the presidential elections (May 28) and the impact they may have on the future path of economic and monetary policy.

The final estimate of Q1 GDP for Germany showed that the Eurozone’s largest economy did indeed fall into recession in Q1 after economic growth was revised down to a contraction of 0.3% q/q after a fall of 0.5% in Q4 2022. A slowdown in consumer activity seemed to be behind the drop in activity though more recent PMI prints have suggested that growth is starting to turn around though is unlikely to show substantial vigour as Germany’s manufacturing sector remains in the doldrums.

The US economy expanded by 1.3% q/q annualized in Q1 according to the second estimate of GDP. That is an upward revision from the initial estimate of growth of 1.1% and was on the back of a healthy improvement in personal consumption which was revised up to 3.8% q/q. Price pressures remain elevated, however, with core PCE q/q at 5% in Q1, marginally higher than 4.9% reported previously.

US initial jobless claims were slightly higher last week at 229k, up from 225k a week earlier but still at levels suggesting strong overall activity in the labour market. Continuing claims for the week prior dropped to 1.79m from 1.8m previously. The non-farm payrolls report for May is due next week with market estimates for about 180k jobs to have been added.

Today’s Economic Data and Events

• 10:00 UK retail sales m/m April: forecast 0.3%
• 16:30 US personal income April: forecast 0.4%
• 16:30 US PCE deflator April: forecast 4.3%
• 16:30 US durable goods orders April: forecast -1%
• 18:00 US U. of Michigan sentiment May: forecast 58

Fixed Income

• Anxiety over the debt ceiling remains the driving force for markets and even as a deal may be forthcoming, a sell-off in Treasuries continued overnight. Yields on the 2yr UST rose almost 16bps to 4.5329%, their highest level since March this year. The 10yr UST yield rose by about 8bps to 3.8174%.
• Markets have more solidly swung toward another rate hike from the Fed at the June-July FOMC meetings with one 25bps hike fully priced in before September. Susan Collins, head of the Boston Fed said she believed the Fed was “at, or near, the point where monetary policy can pause.”

FX

• Markets remain on edge with no debt ceiling deal yet forthcoming. But still the dollar managed to gain against peers. EURUSD fell 0.2% to 1.0725 while GBPUSD sank by 0.4% to 1.231. USDJPY also pushed higher, failing to provide much haven relief, to close at 140.06. Commodity currencies were also uniformly weaker with USDCAD up by 0.4% to 1.3642, AUDUSD down 0.6% to 0.6505 and NZDUSD falling by 0.8% to 0.6063.

Equities

• The NASDAQ had a strong day yesterday, boosted by tech stocks in the chip space especially. The index closed up 1.7%. The S&P 500 was also positive as it gained 0.9%, but the Dow Jones ended the day 0.1% lower.
• There were losses in Europe as Germany’s GDP growth was revised lower. The DAX lost 0.3%, as did the CAC, while the FTSE 100 ended down 0.7%.
• Locally, the DFM dropped 0.1% and the ADX 0.7%. The Tadawul lost 0.5% yesterday.

Commodities

• Oil prices lost some steam overnight after several healthy days of gains. Brent futures fell 2.7% to USD 76.26/b while WTI dropped 3.4% to USD 71.83/b, pulling back from some steeper losses earlier in the day. Russia’s energy minister, Alexander Novak, said that OPEC+ didn’t need to take any additional steps at the upcoming OPEC+ meeting in June, providing something of a mixed message from the hawkish commentary from Saudi Arabia’s energy minister earlier this week.