Marketmind: Fears of 6% and US debt jam
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[May 24, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
World markets are finally bracing for accidents as the U.S. debt ceiling
impasse threatens to empty U.S. government coffers as soon as next week,
but a return of 6% policy interest rates to the risk radar is just as
jarring.
Fear of a technical default on Treasury bills without a bipartisan
agreement in Washington to lift the debt limit by June 1 is causing ever
more ructions at the short end of the debt market.
Tuesday's $35 billion auction of 21-day cash management bills that cover
early June required a whopping 6.2% high yield - more than a percentage
point above Federal Reserve policy rates. One-month bill yields are
hovering just under 5.9%.
And as the political brinkmanship gets intense, there was no sign of a
substantive breakthrough in talks late Tuesday.
Relatively unscathed by the issue until this week, Wall St stock indices
fell back more than 1% on Tuesday and futures remained in the red ahead
of Wednesday's open. Asian and European bourses fell by similar amounts.
The debt limit angst comes as interest rate markets more generally
absorb surprisingly buoyant soundings on global business activity and
some spiky inflation readouts to boot.
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So much so that talk of further Federal Reserve tightening is back. Fed
hawks are in full voice and senior bankers, such as JPMorgan boss Jamie
Dimon, this week mulled risks that rates could get above 6% before
peaking, a level some had feared they might reach before the banking
stress hit in March.
"Five percent's not high enough for Fed Funds - I've been advising this
to clients, and banks, you should be prepared for six, seven," Dimon
said on Monday.
Minutes of the Fed's most recent policy meeting are due out later and
will be scoured for clues about where the centre of gravity among
policymaking lies.
Rates futures are not in the 6% range yet by any stretch, but they put a
one-in-three chance of another quarter-point Fed rate hike next month
and have priced out the likelihood of multiple rate cuts by year-end.
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A trader works on the floor of the New
York Stock Exchange (NYSE) in New York City, U.S., May 22, 2023.
REUTERS/Brendan McDermid
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Central banks elsewhere have even bigger problems.
Pressure on the Bank of England to tighten further mounted on
Wednesday after news that Britain's stubbornly high inflation rate
fell by less than expected last month and a closely watched measure
of core price rises surged to a 31-year high. Money markets rushed
to price a rise in BoE policy rates rising another 75 basis points
to 5.25% by September.
New Zealand's central bank appeared to get more relief despite
another quarter-point hike on Wednesday and signalled it may have
finished tightening.
Elsewhere China's stocks continued to wobble amid underwhelming
economic recovery soundings and intensifying geopolitical concerns
since the weekend G7 summit. The offshore yuan hit its lowest level
of the year against a resurgent dollar.
In corporate news, the artificial intelligence frenzy will be tested
with results from chipmaker NVIDIA - the fifth biggest U.S. stock -
later on Wednesday.
Events to watch for later on Wednesday:
* Minutes from Federal Reserve's most recent Federal Open Market
Committee meeting
* U.S. Federal Reserve Board Governor Christopher Waller speaks,
European Central Bank President Christine Lagarde speaks; Bank of
England governor Andrew Bailey speaks
![](http://archives.lincolndailynews.com/2023/May/24/images/ads/current/bauer_sda_PROMGRAD_2023.png)
* U.S. Treasury auctions 5-year notes, 2-year FRNs
* U.S. corporate earnings: NVIDIA, Analog Devices, Snowflake
(By Mike Dolan, editing by Barbara Lewis mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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