Marketmind: Hot, cold and skipping a beat

[June 01, 2023]  A look at the day ahead in U.S. and global markets from Mike Dolan

If the Federal Reserve does skip raising interest rates this month it's probably because it is as confused as everyone else about the health of the U.S. economy as June kicks off.

Like a patient with a virus, incoming data appears to blow hot and cold at the same time.

While a debt ceiling crisis has finally been averted, with the House of Representatives easily passing a deal overnight that lifts the limit until 2025 and the Senate expected to do likewise by Friday, there was much less clarity on the state of U.S. employment or soundings on factory activity.

Private sector and full national snapshots of payroll growth for May are due later today and on Friday. But a renewed rise in U.S. staff vacancies in April showed the labor market tightening again if anything - even a Chicago manufacturing survey alarmed with a sharp contraction in factory activity last month.

To add to the confusion from overseas, an official readout on deteriorating Chinese manufacturing in May was contradicted by an equivalent private-sector survey released on Thursday.

Yet, seemingly wary of still above-target inflation getting entrenched in wage settlements, the Fed's interest rate deliberations will likely focus mostly on the rude health of employment and record low joblessness.

The central bank's "Beige Book" on economic conditions said on Wednesday that the labor market "continued to be strong" in May "with contacts reporting difficulty finding workers across a wide range of skill levels and industries."

But while Fed hawks have succeeded in convincing financial markets more rate rises are still to come, Fed Governor and vice chair nominee Philip Jefferson held out the prospect that we may not get that additional move this month.

The upshot is a hesitant market, with futures now seeing a 65% chance of another quarter point hike on June 14 - even if a move is almost fully priced by the end of July.

Major investors tend to agree - with more and more doubting a significant recession is in fact on the way.

The Federal Reserve building is pictured in Washington, U.S., on March 19, 2019. REUTERS/Leah Millis/

BlackRock boss Larry Fink said on Wednesday inflation remained sticky and the Fed may need to do more.

"The economy is more resilient than the market realizes," he said. "I don't see evidence that we're going to have a hard landing."

U.S. Treasury yields crept back up on Thursday after the debt ceiling vote overnight and despite the mixed economic picture. But Wall Street futures and European stock markets were higher ahead of the U.S. open.

The dollar was mostly steady, although it set a new high for the year against China's yuan.

Elsewhere, chair of the G20's Financial Stability Board Klaas Knot said bank regulations and how their liquidity buffers are calculated should be reviewed following recent turmoil in the sector.

In company news, shares in Salesforce fell 5% overnight after the San Francisco based firm posted its slowest pace of growth in 13 years as companies dialed back spending on cloud-based software offerings in an uncertain economy.

Events to watch for later on Thursday:

* U.S. May ADP private sector jobs report, weekly jobless claims, U.S. May S&PGlobal manufacturing business surveys, revised Q1 productivity and unit labor costs

* European Central Bank meeting minutes

* Philadelphia Federal Reserve President Patrick Harker speaks

* U.S. corporate earnings: Broadcom, Dollar General, Hormel Foods, Cooper Companies, Zscaler, Lululemon

(By Mike Dolan, editing by Emelia Sithole-Matarise; [e-mail]. Twitter: @reutersMikeD)

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