Market movers today
We start the week off with a slow day on the data front. We get consumer confidence figures from the euro area.
We also have several Fed speakers on the wire.
Overnight, Japanese May PMIs are released. The economy has been picking up in 2023, recently reflected in surprisingly strong Q1 GDP figures. Further strength increases pressures on the Bank of Japan to loosen its grip on the yield curve.
Looking at the rest of the week, PMIs in the other big economies released Tuesday will catch markets’ focus. Besides, we will look out for the German IFO survey, FOMC minutes and US PCE inflation.
The 60 second overview
Debt ceiling: The negotiations between Biden and McCarthy to lift the US debt ceiling are set to resume today. Risk sentiment weakened on Friday when the republican negotiators said the talks had stalled. The treasury cash balance has fallen to just USD57.3 billion, and yesterday Yellen reaffirmed that June 1 ‘is a hard deadline’ for lifting the ceiling in order to ensure avoiding a default. The next round of tax receipts is due to be paid on June 15, which would buy Congress more time for negotiations until July, but whether or not the remaining cash balances are large enough to reach mid-June remains uncertain. We still expect Congress to eventually reach a deal, but the discussions will once again likely go down to the wire.
China: The People’s Bank of China maintained the 1 and 5-year Loan Prime Rates unchanged overnight in line with consensus expectations. The weaker-than-expected economic data in April sparked some speculation on potential rate cuts, and we think that further signs of stalling recovery combined with the still low inflation could eventually push the central bank towards introducing new stimulus measures.
Fed speak: Yields turned lower on Friday afternoon after the Fed’s Powell commented that the ‘policy rate may not have to rise as far as otherwise due to tightened credit conditions’. Yesterday, Kashkari appeared relatively more hawkish, noting that he could support a pause but was also open to hiking rates further at the June meeting. Market prices in around 15% probability of another hike, down from 35-40% before the Powell’s comments. We still think the Fed is now done hiking rates as underlying inflation and inflation expectations appear to be gradually cooling, but we also think the recent upbeat macro data underscores that there is no room for cutting rates this year.
FI: 10Y US Treasury yield rose some 3-4bp on Friday. We are seeing a very slow disinversion of the US curve 10Y-30Y and 2Y-10Y, which is the typical move when we are close to the peak or done tightening monetary policy. Comments during the weekend from both ECB’s Lagarde and Federal Reserve’s Kashkari supports this view as Lagarde stated that ECB was going to raise rates in June, but bulk part of the tightening was done and Kashkari said that he supported a pause in June in order to assess the effects of tightening.
FX: After a strong week for the USD, EUR/USD is trading slightly above 1.08 and USD/JPY just below 138. Scandies had a rough last week, at the end of it exacerbated by thin liquidity which pushed EUR/SEK close to 11.40 and EUR/NOK beyond 11.75.
Credit: iTraxx Main traded slightly tighter on Friday and closed 4.1bp tighter than the week before at 82.6bp, while Xover tightened 17.8bp during the week to close at 434.3bp. The shortened week was characterized by high activity in the primary market, sentiment remains constructive in credit and investor appetite for new deals continues to look solid.
