US debt ceiling discussions continue

The US remains without a deal on the debt ceiling though talks between US president Joe Biden and Republican speaker of the house Keving McCarthy were described as “productive.” Biden said the only way to move forward was for a “bipartisan agreement” though disagreements remain on where to cut spending and on tax relief for some segments of the economy. Adding to the necessity of getting a deal done soon, US Treasury secretary Janet Yellen said the government could run out of money as soon as June 1.

Several Fed speakers showed they were leaning toward tightening policy even more at upcoming meetings, even as Fed chair Jerome Powell said the FOMC could wait for the flow of incoming data. James Bullard, president of the St Louis Fed, said there could potentially be “two more moves this year” and called for them “sooner rather than later.” Bullard had been an outspoken hawk on rates last year but does not vote on the FOMC in 2023. Meanwhile, Neel Kashkari of the Minneapolis Fed said a pause or a hike in June was “a close call” and that it was important for the Fed to not signal “we’re done.”

From the European Central Bank, Governor Pablo Hernandez de Cos, said the ECB still has “some way to go” and that rates will need to be in a restrictive stance for “a long time” to help meet inflation targets. Markets are nearly fully pricing in at least two more 25bps hikes from the ECB at their June and July meetings.

S&P Global estimates that Dubai’s debt level will fall to 51% of GDP in 2023, down from nearly 80% in 2020, thanks to “robust economic growth.” S&P estimates GDP growth of 3% for Dubai this year while also highlighting structural reforms that should help to support longer-term, more sustainable growth.

Today’s Economic Data and Events

• 11:15 FR France composite PMI May: forecast 52
• 11:30 GE Germany composite PMI May: forecast 53.4
• 12:00 EC Eurozone composite PMI May: forecast 53.5
• 12:30 UK Composite PMI May: forecast 54.6
• 17:45 US Composite PMI May: forecast 53

Fixed Income

• The hawkish messaging from several Fed officials helped to sink US Treasuries at the start of the week, even as the debt ceiling remains unresolved. Yields on the 2yr UST added about 5bps to close at 4.3154% while the 10yr yield gained 4bps to settle at 3.7148%. Markets are still pricing in about a 1 in 5 chance of a 25bps hike at the June FOMC.
• Turkish bonds closed weaker overnight with 10yr local currency yields up 25bps at 8.78%. The support of a smally party for AKP in the upcoming presidential run-off election should clear the way fore president Erdogan to win another term and maintain his government’s stance on economic policy. South African bonds were also cheaper, with yields up 9bps at 12.33%.

FX

• Currency markets had a quiet start to the week with most pairs likely waiting for the outcome of debt ceiling discussions before taking a move in one direction or the other. EURUSD settled with an upward bias at 1.0813 while GBPUSD moved marginally lower to 1.2438. USDJPY was the relative outsize mover, with a gain of 0.5% to 138.60.
• In commodity currencies price action was also limited. USDCAD closed unchanged at 1.3505, perhaps limited in volume thanks to a public holiday in Canada. AUDUSD and NZDUSD were also virtually unchanged at 0.6653 and 0.6287 respectively.

Equities

• Equity markets were somewhat torn by moderate positivity on the debt ceiling discussions, and the hawkish messaging from Fed members. The benchmark US indices were mixed as the Dow Jones closed down 0.4%, the NASDAQ added 0.5%, and the S&P 500 closed almost flat.
• There was a similar lack of concrete direction in Europe, where the FTSE 100 added 0.2% while the CAC dropped 0.2% and the DAX lost 0.3%.
• Locally, the DFM added 0.1% and the ADX 0.5%. The Tadawul closed 0.1% lower.

Commodities

• Oil prices started the week on a stronger footing with Brent futures up 0.5% at USD 75.99/b and WTI added 0.6%to USD 71.99 and both are extending modest gains in early trade today.
• The OPEC Secretary General, Haitham al Ghais, warned that current underinvestment in oil and gas could “endanger” energy security and economic growth in the next decades.