US EARLY MORNING: White House, Republicans inch closer to debt deal; PCE inflation data ahead

DEBT CEILING TALKS: US President Joe Biden and House Speaker McCarthy are nearing a potential deal to raise the government's debt ceiling for two years, while imposing spending caps on most items, according to Reuters. The proposed agreement would allocate increased funds for military and veterans' discretionary spending, while keeping non-defence discretionary spending at current levels. The White House confirmed progress in debt ceiling talks, with negotiations centring around the top-line number and the difference between White House and Republican proposals narrowing to less than USD 70bln on discretionary spending. Sources suggest a simplified agreement with key figures is likely to be reached. House Speaker McCarthy stated that no agreement was reached on Thursday and committed to continue working throughout the weekend until a resolution is achieved, acknowledging the challenges involved, as reported by Reuters. Elsewhere, the Treasury is planning to modify payment processing for federal agencies if the debt ceiling is breached. Under the new approach, agencies would submit payments to the Treasury no earlier than the day prior to the due date. In the event that the Treasury lacks sufficient funds for full-day payments, delays would occur until enough cash is available, Wall Street Journal reported.

DAY AHEAD: The focus will be on the US Personal Income, Spending and PCE metrics for April. Core PCE prices are seen rising 0.3% M/M, matching the prior rate, but the annual gauge of core PCE is still expected to be unchanged at 4.6% Y/Y (see below). Durable goods data for April is expected to show a decline of 1.0% M/M vs last month's rise of 3.2%. The advanced goods trade data for April is also out at the same time. Meanwhile, after the open, final University of Michigan sentiment stats for May will be released, and there will be particular focus on the inflation expectations measures after the flash data showed that the long-term inflation gauge jumped to a 12-year high (3.2%) in May while headline consumer sentiment declined. On the speakers slate, ECB chief economist Lane, ECB's Enria, ECB's Vujic are all due to speak again. Baker Hughes weekly rig count data will be eyed after the previous two reports triggered market moves at the tail end of the week. Finally, on the credit ratings front, we will be alert to the possibility that S&P and Moody's will join Fitch and DBRS in warning about US debt ceiling dynamics. Elsewhere, Fitch is set to review Spain's Sovereign Debt Rating (currently A-), while Moody's may review the Czech Republic's rating (currently Aa3). Out interactive Day Ahead calendar is here, a pdf version can be accessed here.

PREVIEW – PCE (13:30BST/08:30EDT): Core PCE prices are expected to rise 0.3% M/M in April, matching the rate of growth seen in March, while the annual measure is likely to remain at 4.6% Y/Y. "The PCE deflator is likely to confirm that gradual disinflation continued in April, but the run rate remains above the Fed’s target," Credit Suisse. Although the two series have differences, CPI data for April showed core goods prices picking up, but Credit Suisse says that disinflation in shelter (which has a smaller weight in the PCE series vs the CPI) should offset most of this so to keep the monthly inflation rate flat. Meanwhile, analysts expect both Personal Income and Personal Spending to register 0.4% M/M growth in April (from the prior 0.3% and 0.0% respectively). As a reference point, the April retail sales data was mixed (the headline disappointed, but the details were more encouraging); Capital Economics said the data indicated that the economy remained resilient to the impact of higher interest rates and tightening lending standards, but real consumption growth was still likely to slow quite sharply in H2.

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

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