Markets to Watch This Week: Debt Ceiling Developments and Key Inflation Prints

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Market Moves Over the Past Week

It was Fed speaker galore last week as we had 14 public appearances from FOMC members Bostic, Kashkari, Cook, Mester, Barr, Williams, Logan, Jefferson, Bowman and Powell. Market pricing went from no hikes to a one-in-four chance of a further hike in June, largely based on what we heard. We saw the 2s10s curve bear flatten, with the 2Y moving up by 7 bps more than the 10Y (Chart 2).    

New Zealand’s new budget could add to inflationary pressures as the Labour government announced a new NZ$2.5bn package with the cost of living related to childcare. The package includes free public transport for children, free prescription medicines, and expanded free childcare for toddlers. There was also a further spend of NZ$6bn announced for the clean-up and recovery from Cyclone Gabrielle and January’s floods. In response, we saw higher yields for NZ government bonds and a stronger Kiwi dollar as the market increased their terminal rate expectations higher to 5.75% (Charts 1 and 3).

The exuberance in AI stocks continues led higher by NVDIA which ended the week up by more than 10%. The chip company has now contributed almost 15% to the S&P 500’s year-to-date returns. All eyes will be on the company’s earnings this Wednesday to gauge for signs of how increased demand for AI chips will impact the firm going forward. Note, Jensen Huang has previously said that AI chips only account for a “tiny, tiny, tiny” single-digit percentage of revenue over the past 12 months.

The UK labour market showed signs of easing. The big surprise was the HMRC’s April data, which showed its largest MoM decline in payrolled employees since the series began in 2014 (ex-COVID crash).

Turning to global markets, the Japanese Topix index reached a 33-year high last week as foreign inflows continue to be buoyed by promises of furthering governance reforms which should increase stock buybacks and dividends. We’ve also seen signs of a broader acceleration in domestic activity as the S&P Services PMI for Japan reached an all-time high of 55 in April.

What to Watch

We know US Q2 growth will be strong, but is inflation still sticky? The Atlanta Fed Q2 GDP nowcast rose to 2.9% QoQ SAAR from 2.7% a week ago. This week, PCE, personal income and spending data on Friday will be key to watch. Supercore (core services ex housing) inflation around 4.5% YoY would add to Dominique’s conviction of a hike in June (barring a debt ceiling crisis). She is also looking for a moderate increase in the personal savings rate and a continued acceleration of the growth in real household income, excluding transfers, to support my positive views on growth and inflation.

Outside of the PCE data, we have flash PMI surveys from S&P, as well as durable goods on Friday.

Debt ceiling debacle continues. The Republicans walked out of the debt ceiling negotiations on 19 May, explaining that the White House is not fully engaged. The strategy of the White House has been to call for a non-negotiable, unconditional debt ceiling increase or suspension.

UK inflation remains in the spotlight. UK inflation (Wednesday) will be particularly important after the dovishness revealed by last week’s labour market release. Market expectations are for headline inflation to have dropped to 8.2% YoY. There is some upward lean to the expectations, which could mean a higher outturn, but it would still present a sizeable reduction from the 10.1% of March. The BoE sees inflation averaging 8.2% in Q2, so if the consensus turns out correctly, this could be signs of an early undershoot in their projection.

European central bank speakers are set to take over from the Fed this week. Henry expects that the hawks within the ECB will continue to make their voices heard after the strong upward shift in consumer inflation expectations. Elsewhere, euro area PMIs will be key to watch. The early read-through from both Sentix and the Zew index is that we could see a turn lower, so week’s flash PMIs will be particularly interesting.

This week, Dominique and Andrew turn their attention to the debt ceiling saga and discuss whether the market is underprepared for any potential left tail outcomes. Dominique also outlines what she sees as the major difference this time round, versus 2011.

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)