Debt ceiling progress
This Daily Digest will cover:
- Debt ceiling progress
- USD holds on to gains
The sunshine wasn’t the only good thing to come out of this bank holiday weekend. As the UK returned to work, markets were met with some positive traction on the US debt ceiling deal. Biden and House Speaker Kevin McCarthy have brokered a deal to suspend the $31.4tn debt ceiling until 2025. This passed a key hurdle yesterday evening and will now go to the House of Representatives. The debt ceiling talks have been largely political and as such, markets have been trading on the assumption a deal would go through. Nevertheless, the US dollar trades bid this morning with some of its gains possibly attributed to the progress.
As talks around the debt ceiling hopefully come to an end, the spotlight should focus back on to the Fed and their plan on how to combat the sticky inﬂation. With headline & core PCE coming in higher on Friday and durable goods printing 1.1% vs -1%, discussions around rate pauses have stopped and markets have now fully priced in one additional 25bps hike by July’s meeting and a 66% chance of this hike occurring earlier at the 14 June meeting.
With the FTSE down 4.5% this month and US stocks up, we expected some cable buyers to emerge yesterday as portfolios were rebalanced for month-end. This came to fruition and saw GBPUSD trading at 1.2445. Despite this, Cable and EURUSD are currently trading over 100 points lower than the start of last week and my view is that the dollar continues to hold on to these gains until at least the June meeting. We’ll get some more colour here with several Fed members speaking and JOLTS today, ADP tomorrow and NFP on Friday.
Despite the inﬂationary data, stocks marched higher into Friday close that continued on Monday. Fuelled by Nvidia and progress with debt ceiling negotiations and with the inﬂation still proving sticky, I feel we’ll see US stocks give back some gains this week.
Cross yen took a bit of a beating yesterday as BOJ, MOF and FSA ofﬁcials met and hinted that, if needed, they would respond to a weakening yen, stating that “If necessary, we won’t rule out every option available”. However, I can see yen remaining on the backfoot as long as the ultra loose monetary policy persists. This doesn’t look to change anytime soon, especially given the recent miss in month-on-month output ﬁgures (-0.4% vs expected 1.4%).
BTC and ETH remained relatively resilient to inﬂationary pressures and made gains over the weekend before giving them back this morning. US data over the next week will be key to see where crypto goes next.
As always, good luck.
Diogo Da Silva