Marketmind: Debt deal is near, Fed peak is not
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 [May 26, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
As the AI-led tech stock boom unfolds, there's light at the end of the
U.S. debt ceiling saga - only markets now reckon the Federal Reserve
will tighten policy even further this summer.
Investors juggled these three strands over the past 24 hours, with
top-line equity index relief from the Nvidia-inspired spur to artificial
intelligence and chip stocks everywhere.
More broadly, there were signs the U.S. economy is still sailing through
the choppy waters - at least without any major disturbance to the labor
market yet. And the banking stress that changed the picture in March
appears to be settling too, judging by the latest central bank numbers.
Encouraged by more hawkish policymakers this week, the upshot has been a
remarkable rethink of Fed policy horizon that now has futures markets
almost fully pricing another quarter point rate hike to the 5.25-5.50%
range by the end of July.
And it is not alone. Bamboozling the British gilts and sending bond
yields soaring after another dire UK inflation readout this week, the
Bank of England is now expected to raise its rates four more times to
5.5% this year too. Buoyant retail figures for April out on Friday won't
stand in their way.
Friday brings some hope that White House and congressional leaders can
ink a deal on lifting the U.S. debt ceiling they indicated overnight was
now close - just before the Treasury Department runs out of cash from
June 1 next week.
Reuters sources said the two sides, who met virtually on Thursday, are
just $70 billion apart on a total discretionary spend by government of
over $1 trillion.
It's unclear precisely how much time Congress has left to act. Even
though the Treasury Department insists June 1 is the deadline, it said
on Thursday it would sell $119 billion worth of debt that will come due
on that date - suggesting to some market watchers that it was not an
iron-clad deadline.
Anxieties in the Treasury bill market only eased a touch, and one-month
bill yields remained above 6% early Friday.
And the persistent elevation of the rest of the near-term yield curve is
due both to the new Fed rate rise pricing and expectations that, even if
the debt ceiling is raised, the Treasury Department will have to rush to
issue up to $1 trillion of new debt securities to meet short-term
funding needs.
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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
On Fed thinking at least, the release later on Friday of the April
personal income expenditures (PCE) inflation gauge will be the
dominant data publication ahead of a long weekend state-side.
The resurgent U.S. dollar gave back some of this week's sharp gains
around the world on Friday.
Calming down a bit from Thursday's Nvidia spur, S&P500 stock futures
were flat going into the open - with bourses around the world
modestly higher.
As an indication of just how tech-focused this year's stocks rally
has been, the FANG+TM index of 10 leading digital, chip and tech
names is up 55% so far in 2023 while the Russell 2000 of mostly
small cap U.S. stocks is unchanged.
That said, Nvidia's 25% surge sent the whole chip sector soaring on
Thursday. The Philadelphia SE Semiconductor index jumped almost 7%
to its highest level in more than a year in its biggest daily rise
since November.
And shares in Marvell Technology surged 17% overnight after it
forecast its AI revenue would double for the year, becoming the
second U.S. chip company in as many days to bet on the breakthrough
technology.
Events to watch for later on Friday:
* U.S. April personal spending, income and PCE inflation gauge;
April durable goods orders; April goods trade balance and wholesale
and retail inventories; Kansas City Federal Reserve's May services
index
* Debt ceiling negotiations
(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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