US EARLY MORNING: US equity futures and Treasuries are rallying as traders return from the long weekend; Biden-McCarthy strike debt ceiling deal, but passage through Congress may be a challenge; ISM and NFP this week

OVERNIGHT: Asia-Pacific stocks had mixed trading with rangebound price action. The ASX 200 and Nikkei 225 experienced losses, while KOSPI outperformed. Hang Seng and Shanghai Composite were pressured. Traders are watching tomorrow's China PMI data releases, and how European and US cash markets react to the US debt ceiling agreement. Our APAC wrap is here. European equity markets startED Tuesday trade in A choppy fashion with traders returning from the long weekend. Data out of Spain showed flash HICP -0.2% M/M in May, lower than the expected +0.3%; the annual measure cooled to 2.9% Y/Y (exp. 3.4%) from 3.8%; the core reading printed 6.1% Y/Y, down from 6.6%. INE said 12-month inflation had not fallen to the lowest levels since July 2021. Bunds rallied on the lower than expected reading ahead of German releases due Tuesday. In the UK, data from the BRC showed UK shop price inflation rising to its highest level since 2005, with prices in supermarkets and retail chains increasing +9.0% Y/Y in May. However, food price inflation slowed to +15.4% Y/Y. Our European morning cash open note is here. 

US PRE-MARKETS: US equity futures are higher after a deal was struck between President Biden and House Speaker McCarthy on the US debt ceiling; many note that its passage through Congress could still be a challenge given the extreme positions on both sides of Congress, and the Bill will need bipartisan support. We have further analysis below. Treasuries are rallying, likely also assisted by European peers after Spanish inflation metrics surprised to the downside, which augurs well for the German data released on Wednesday and the Eurozone data out on Thursday. In FX, the Dollar Index is higher, just beneath 104.50; the main story has been from Asia, however, with the CNH weakening above 7.10 against the buck to a new five-month high; the PBoC is seen to be tolerant of the yuan's moves, as long as they are gradual. Japanese officials are not so sanguine, however, and are holding late meetings after USDJPY vaulted 140.00; officials will give a press conference after their meeting, and are expected to warn on rapid currency moves. In energy, crude futures have tilted to the downside despite initially rallying on the week's reopen following the debt ceiling news; the mixed tone in Asia, and the negative tone in Europe may be contributing, while reports suggest that ahead of the June 4th OPEC+ meeting, Saudi Arabia and Russia are experiencing tensions as Russia continues to flood the market with cheap oil, undermining Saudi efforts to stabilise prices; elsewhere, OPEC SecGen said the cartel will welcome the return of Iran to oil markets when sanctions are lifted, adding that Iran had the capacity to bring significant production volumes in a short period of time.

DEBT CEILING DEAL: President Biden and House Speaker McCarthy have struck a deal over the debt-ceiling. The agreement would avert a US default, suspend the debt ceiling until 1st January 2025, cap federal spending for the next two years, claw back unused COVID funds, hasten the permitting process for some energy projects, and include extra work requirements for food aid programmes. The plan now faces a push through Congress, where it will likely face objections from both sides of the aisle. Lobbying is already underway to secure votes; Biden staff have already contacted many Democrats, McCarthy expects the majority of Republicans in the House will vote for the bill, while Republican Senate Leader Mitch McConnell has also backed the deal. Secretary Yellen suggested it is likely that the Treasury would have enough funds to make around USD 130bln of payments due Thursday and Friday, but said that the US will run out of money to cover its obligations on time by 5th June, and subsequently the Treasury could begin missing payments, though it is unclear which ones. Ratings agency Moody’s has previously said that missing the X-date would see them reassess US ratings, but so long as interest and principal on bonds was being paid, a default may be avoided. Analysts at Goldman Sachs said that “reaching a deal between leaders had been the highest hurdle and this agreement eliminates most of the uncertainty regarding the impending debt limit deadline, though the legislation must still pass the House and Senate,” Goldman Sachs said, noting that the House is slated to vote Wednesday (May 31st) while the Senate could vote by Friday (June 2nd), though it would not be surprising to see procedural delays push the vote into the weekend. “Regardless, the chances that Congress allows the June 5th deadline to pass without action now appear very low, GS said, adding that the deal itself is expected to trim GDP spending by 0.1-0.2% annually in 2024 and 2025, but FY23's funding boost may keep overall discretionary spending slightly higher next year.

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30 May 2023 - 09:05- Research Sheet- Source: Newsquawk

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