© Reuters. FILE PHOTO: The Federal Reserve Building in Washington on March 18, 2008. REUTERS/Jason Reed/
A look at the coming day in the US and global markets from Mike Dolan
From the frying pan to the fire?
The relief about a potential hike to the US debt ceiling this week is being dampened by the troubling prospect of higher Fed interest rates – and further evaporation of any hopes of cooling in 2023.
With US markets reopening after Monday’s holiday, investors must now estimate the possibility that both houses of Congress will vote to raise the US debt ceiling this week, after the White House and Republican leaders finally strike a deal before the Treasury Department runs out of cash before a new issue. Deadline 5 June.
While the extreme wings of both parties have expressed some concern about the details of the agreement, the market assumption is that the moderates will go through with the agreement by Friday. Then comes up to $1 trillion in new debt sales by the Treasury Department by the end of the year to replenish its coffers — something that could cause volatility in the bill market amid a shuffling of cash management strategies.
But with some measures of US inflation proving steadier than many expected and the May unemployment report due on Friday, there is growing expectation that the Federal Reserve will raise interest rates again next month – and rates may not be lower at the end of the year than they are now.
Futures markets now see a 60% chance that the Fed will raise rates by another quarter point to the 5.25-5.50% range at its June 14 meeting. And while that rally may be reversed by the end of the year, the Fed’s implied rate for the end of 2023 is 10 basis points lower than it is now.
Although largely illiquid outside of US business hours, one-month Treasury yields were about 10 basis points higher than Friday’s close.
With the debt deal poised to further tighten fiscal policy and fears of credit rate cuts and defaults easing, the two- and 10-year US Treasury yields were down about 5 basis points on Tuesday compared to Friday’s close. US sovereign default swaps also fell slightly.
The dollar hit its highest levels since mid-March, as the yen led the way to a six-month low – with late speculation about Tuesday’s meeting between Bank of Japan and Finance Ministry officials causing some late volatility there.
US stock futures rose about 0.5%, in part due to debt deal easing – although, unlike the last big debt ceiling showdown in 2011, there has been little noticeable turmoil in stock indexes over the past month.
Technology and artificial intelligence fueled speculation was a bigger factor, with last week’s earnings from the likes of Nvidia (NASDAQ:) and Marvell (NASDAQ:) sending those two stocks up more than 20% each.
Elsewhere, stocks in Asia and Europe were modestly higher. Weekend news of a snap election in Spain later this year was 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 decline to 3.5%.
Oil prices have also fallen, with the annual drop in prices now at nearly 38% – its biggest annual decline since 2020.
The collapsing Turkish lira hit record lows again on Tuesday – down more than 2% since President Recep Tayyip Erdogan was re-elected in Sunday’s elections amid fears his increasingly authoritarian rule and unorthodox economic policies will continue to undermine the currency.
Events to watch later on Tuesday:
* US Consumer Confidence for May, Dallas Fed Survey for May, House Prices for March, Home Price Purchase Index for the First Quarter
* The House Rules Committee considers a debt ceiling bill proposal, 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 (NYSE:)
(Writing by Mike Dolan, Editing by Susan Fenton, mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)