US debt ceiling drama aside, world economy looks shaky

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A look at the coming day in the US and global markets from Naomi Rovnik

Risk appetite has increased in global markets thanks to optimism that US Democrats and Republicans are close to a deal to raise the debt ceiling and avoid an economic default.

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European and Asian stocks rose on Thursday, the dollar held near a seven-week high against a basket of major currencies, and Wall Street stock futures point to a flat open after the S&P 500 rose nearly 1.2% on Wednesday.

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But while raising the debt ceiling could boost markets in the days ahead, the backdrop to a lackluster global economy remains unchanged, with its twin engines, China and the United States, faltering.

A dose of growth from China should help risk appetite in the long run, but expectations for the world’s second-largest economy emerging from the shackles of COVID-19 restrictions are proving far from reality.

China’s renminbi has crossed $7 against the dollar, down 1.4% this year, after reports of slowing industrial production and retail sales and slowing home price gains, all despite real estate stimulus policies and the release of pent-up demand.

Citi’s China Economic Surprise Index fell to its lowest level since January, in another sign of the weak growth outlook.

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Meanwhile, US corporate earnings paint a bleak picture of consumer caution as the delayed impact of interest rate hikes meets above-target inflation.

Big-box retailer Target on Wednesday reported a bleak second quarter as customers shy away from spending on non-essential electronics and home goods due to higher prices, a day after Home Depot cut its annual sales estimates.

Walmart, which may be stronger due to its focus on low-price fundamentals, is publishing its own update later in the day.

The S&P 500 trades at a rich 18 times expected earnings index, buoyed by the huge tech stocks that dominate the index. Apple’s market capitalization exceeds that of the small Russell 2000 index, and the tech-heavy Nasdaq 100 index is up 24% this year.

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Technology is booming amid expectations that the Federal Reserve will start cutting interest rates from July, adding to the appetite for rate-sensitive growth companies whose valuations are good when money gets cheaper. Further outbound performance depends on the markets being right about the Fed’s willingness to cut interest rates from July.

A slew of Fed speakers this week argued for keeping monetary policy tight while inflation remains high.

Developments that may affect the markets on Thursday:

* Economic Events: US Initial Jobless Claims, US Existing Home Sales, Philly Fed Business Index.

Central Bank Speakers: Federal Reserve Governor Philip Jefferson, Federal Reserve Vice Chairman for Supervision Michael Barr.

Earnings: Walmart, Alibaba, Applied Materials.

(Reporting by Naomi Rovnik; Editing by Emilia Sithole Mataris)