Saxo Spotlight: US debt ceiling deal brings relief, but liquidity concerns could halt the rally - May 29-Jun 2
Macro

Saxo Spotlight: US debt ceiling deal brings relief, but liquidity concerns could halt the rally - May 29-Jun 2

APAC Strategy Team

Summary:  President Biden and House Speaker McCarthy have reached an agreement to raise the US debt ceiling, extending it until January 2025 while imposing new restrictions on federal government spending. The draft bill will face a crucial vote in the House of Representatives, followed by the Senate, with the deadline to address the debt ceiling approaching on June 5. In the US labor market, upcoming data on job openings and nonfarm payrolls will be closely watched to determine if wage pressures are receding. Meanwhile, the Eurozone is experiencing a potential energy-driven slowdown in inflation, although core inflation remains firm. In China, economists anticipate a contraction in manufacturing PMIs but continued expansion in non-manufacturing activities, highlighting the uncertain trajectory of China's economic recovery.

The Biden-McCarthy deal raises the debt ceiling, imposing pending curbs and averting default risk

President Biden and House Speaker McCarthy reached a significant agreement on Saturday evening, holding the potential to alleviate concerns surrounding the US debt limits. The deal, if successfully passed by both the House and the Senate in its present form, will effectively extend the debt limits until January 2025. Concurrently, it will establish fresh restrictions on federal government spending over the same period. Notably, the agreement manages to sidestep the implementation of new taxes, while preserving non-defense spending at a level roughly consistent with the status quo in 2024. Furthermore, it allows for a modest increase of approximately 1% in non-defense spending for the subsequent year of 2025.

The draft bill is expected to be put up for a vote in the House of Representatives on Wednesday, 31 May. Republican lawmakers currently possess a 222-213 majority in the House, rendering the outcome delicately balanced. Should fewer than ten Republicans oppose the deal, its defeat would be imminent. Upon receiving approval in the House, the bill will advance to the Senate for voting. In the Senate, Democrats maintain a slim 51-49 majority, presenting a potential obstacle to the legislation's progress.

Both Speaker McCarthy and President Biden exuded confidence on Sunday, expressing their belief that the draft bill will successfully navigate both chambers of Congress prior to 5 June. This date assumes great significance as it marks the point at which the US Treasury is projected to exhaust its cash reserves, potentially precipitating a calamitous default by the US government.

Notably, the duration of the new limits will extend beyond the upcoming presidential election in November 2024, leaving the onus of addressing this matter to the subsequent administration during the first half of 2025.

Once the bill is enacted and the specter of default is successfully dispelled, investors will undoubtedly shift their focus towards assessing the Treasury securities markets' capacity to absorb the impending surge in new issuances. Moreover, attention will be directed towards the impact on liquidity as the Treasury replenishes its cash balance at the Federal Reserve. This process entails depositing approximately USD 500 billion of security sales proceeds into the Treasury General Account, thereby effectively draining an equivalent amount from banks' excess reserves and constricting liquidity within the banking system.

US: Is the pace of cooling in labor market enough for the Fed?

With the US debt ceiling concerns easing for now, focus will shift to economic data again in the week ahead after last week’s hawkish repricing of the Fed curve. The banking sector concerns that possibly ignited a pause message for June have eased, while PCE data last Friday indicated that inflation continues to come down very slowly. Labor market data will be key to watch in the week ahead to confirm if wage pressures are receding, and JOLTs job openings in due on Wednesday with the May nonfarm payrolls (NFP) to follow on Friday. Bloomberg consensus continues to expect over 9 million job openings, still translating to 1.5 jobs per unemployed worker. Meanwhile, May jobs report is expected to show a slowdown in the pace of hiring from 235k in April and a higher unemployment rate. However, the cooling of the labor market appears to be far more gradual than what the Fed would have expected after tightening policy over the last one year. Wage growth numbers will be key to watch, and firmer-than-expected data could bring a further hawkish tilt in Fed expectations. The Japanese yen may be hit further in that case, invoking fears of a potential intervention or changes in BOJ policy. The ISM manufacturing print for May, due on Thursday, will also be relevant for markets to assess the pace of slowing in demand as well as the price pressures.

Eurozone: Energy-driven slowdown in inflation may not last

Recent reports have suggested that prices for EU gas could turn negative this autumn. This is because the total inventory levels across Europe are currently near 67% full and if the current sluggish demand and brisk pace of injections via pipelines and LNG arrivals continue, we may see storage facilities top out by September or October. This is also pushing inflation lower with the May print expected to ease to 6.3% YoY from 7.0% YoY previously on the headline. Core measure is however seen firm at 5.5% YoY in May from 5.6% YoY previously and faces further upside risks as services prices head higher during the summer travel season. Markets expect another two full rate hikes from the ECB this year, and ECB members continue to highlight persistent inflation pressures. EURUSD is however on a downward trajectory since early May, and a sharper-than-expected slide in May CPI could bring a test of 1.06.

Economists expect China’s manufacturing to contract and non-manufacturing to slow

Investors are now presented with a fresh set of insights aimed at discerning the trajectory of China's much-anticipated economic revival, ascertaining whether the weakness exhibited in April's data was merely a transient blip or indicative of a waning recovery. Economists surveyed by Bloomberg forecast that both the official NBS manufacturing PMI and the private Caixin manufacturing PMI will register at 49.5, marginally below the pivotal 50 mark, thereby remaining within contractionary terrain. Notably, economists have taken cognizance of the decline in the Emerging Industries PMI, which retreated from 53.1 in April to 50.7 in May. In addition, South Korea's exports to China, widely considered a bellwether for China’s manufacturing sectors, have recorded a contraction of 23.4% Y/Y during the initial 20-day period of May.

Meanwhile, economists in the Bloomberg survey expect continued expansion in non-manufacturing activities, albeit at a more moderate pace. The NBS non-manufacturing PMI, encompassing construction and services, is projected to decelerate from April's reading of 56.4 to 55.3 in May. Similarly, the Caixin services PMI is anticipated to dip from 56.4 in April to 55.2 in May.

Australia: April CPI could rise, but AUD could find it hard to turn back higher

The monthly CPI for Australia is due on Wednesday, and April inflation is expected to tick higher to 6.4% YoY from 6.3% YoY previously when food prices saw notable gains. A weaker-than-expected print could confirm the bias from the Reserve Bank of Australia to pause at the next policy meeting on June 6. This would mean AUDUSD could also extend its down move further below 0.65 handle. However, if the print come out to be firmer-than-expected, it will complicate the task of the RBA. RBA Governor Lowe will be delivering a speech on Tuesday, a day before the Australian CPI is released, as he appears before the Senate in Canberra at 09:00AEST.

Salesforce's Q1 Earnings: expecting profitability gains amidst technology spending slowdown

The U.S. Q1 earnings season has concluded, resulting in a thinner earnings calendar. One notable upcoming release is Salesforce's FY24 Q1 earnings report (ending 30 Apr), scheduled for Wednesday after market close. Analysts anticipate revenue of USD 8.2 billion, marking a 10.3% Y/Y increase, along with an EBITDA of USD 3 billion compared to USD 1.2 billion from the previous year. This surge in profitability is attributed to cost-cutting initiatives implemented by the business software application maker. Despite a slowdown in technology spending observed across the industry, including Snowflake and others, Salesforce's revenue growth remains robust. However, the focus for both investors and management has shifted from achieving 20% revenue growth to generating free cash flow. Consequently, we expect Salesforce to experience significant improvements in profitability over the next five years. As a result of management's emphasis on profitability, Salesforce shares have surged by 58% this year.

Earnings this week:

Monday 29 May: AAC Technologies, SATS

Tuesday 30 May: HP, HP Enterprise, JOYY

Wednesday 31 May: Salesforce, Crowdstrike, Okta

Thursday 1 Jun: Broadcom, VMware, Lululemon Athletica, Dell Technologies, MongoDB, Zscaler, Dollar General, Hormel Foods, Bilibili

Key economic events this week:

Monday 29 May

U.S.                 Markets are closed for Memorial Day

Tuesday 30 May

U.S.                 Conference Board consumer confidence (May)
Eurozone         M3 growth (Apr)
Eurozone         Consumer confidence & economic confidence (May)
Japan              Unemployment rate (Apr)
Australia          Building approval (Apr)

Wednesday 31 May

U.S.                 Chicago PMI (May)
U.S.                 JOLTS job openings (Apr)
U.S.                 Fed Beige book
Germany         CPI EU harmonized (May)
Japan              Industrial production (Apr)
Japan              Retail sales (Apr)
J
apan              Housing starts (Apr)
China               NBS manufacturing PMI & non-manufacturing PMI (May)
Australia          CPI (Apr)
Australia          Private sector credit (Q1)
India                Real GDP (Q1)
South Korea    Industrial Production (Apr)

Thursday 1 June

U.S.                 ADP private employment (May)
U.S.                 Initial jobless claims (weekly)
U.S.                 ISM manufacturing index (May)
Eurozone         CPI EU harmonized (May)
Japan              Investment in plant and equipment (Q1)
China               Caixin manufacturing PMI (May)
South Korea    Exports (May)

Friday 2 June

U.S.                 Non-farm payrolls, average hourly earnings, & unemployment rate (May)


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