[1/2] Visitors walk on the grounds of the U.S. Capitol during ongoing negotiations to reach an agreement to raise the U.S. debt ceiling and avoid a catastrophic default, in Washington, U.S., May 24, 2023. REUTERS/Jonathan Ernst
A Look Ahead in US and Global Markets by Mike Dolan
Out of the frying pan, into the fire?
Relief over a possible U.S. debt ceiling hike this week is being tempered by the bleak prospect of even higher Federal Reserve interest rates, further evaporating hopes for a 2023 easing.
As U.S. markets reopen after Monday’s holiday, investors must now assess the likelihood that both houses of Congress will vote this week to lift the U.S. debt ceiling after the White House and Republican leaders finally hammered out a deal until the treasury will run out of cash until new. June 5 deadline.
While the extreme wings of both parties have expressed some concern over the details of the agreement, market speculation is that moderates will deliver it by Friday. Then comes the Treasury’s sale of up to $1 trillion in new debt by the end of the year to replenish its coffers, which could cause volatility in the bill market amid a shift in cash management strategies.
But with some U.S. inflation gauges tighter than many had predicted and May’s unemployment report due on Friday, there are growing expectations that the Fed will raise rates again next month, and year-end rates could not be lower than now.
Futures markets now see a 60% chance the Fed will raise rates by another quarter to a range of 5.25-5.50% at the June 14 meeting. And while such an increase may be delayed until the end of the year, the implied interest rate at the end of 2023 is 10 basis points lower than it is now.
While mostly illiquid after-hours in the US, yields on one-month Treasury notes were about 10 basis points higher than Friday’s close.
With a debt deal set to tighten fiscal policy and fears of a rate cut and default, US 2-year and 10-year Treasury yields fell nearly 5 basis points on Tuesday from Friday’s close. US sovereign credit default swaps also eased slightly.
Between Bank of Japan and Finance Ministry officials, the dollar has caused some late volatility there.
U.S. stock futures were about 0.5% higher, partly due to the easing of the debt deal, although unlike the big debt ceiling close in late 2011, there has been little movement in stock indexes over the past month.
Speculation in tech and artificial intelligence has been a bigger factor, with last week’s earnings from the likes of Nvidia and Marvell pushing both stocks up more than 20% each.
Elsewhere, stocks in Asia and Europe were modestly higher. News over the weekend of snap elections in Spain later this year were partially offset by encouraging inflation news early Tuesday.
Spanish inflation slowed to 3.2% year-on-year in May, down from 4.1% in April and well below economists’ expectations of a 3.5% drop.
Oil prices also fell, with Brent crude now down nearly 38% year-to-date, its biggest annual decline since 2020.
The Turkish lira hit another record low on Tuesday, falling more than 2% after President Tayyip Erdogan was re-elected in Sunday’s election as his day-to-day authoritarian rule and unorthodox economic policies continue to undermine the currency.
Events to watch later on Tuesday.
* May US consumer confidence, Dallas Fed May manufacturing survey, March home prices, first quarter home purchase index
* The House Rules Committee passes a proposed debt ceiling bill, a necessary step before a full House vote
* Richmond Federal Reserve President Thomas Barkin speaks
* US Treasury auctions of 3-month and 6-month bills
* US corporate earnings: HP
By Mike Dolan, Editing by Susan Fenton mike.dolan@thomsonreuters.com: Twitter: @reutersMikeD
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