A slow-motion relief rally continues to unfold across the financial markets as President Biden and House Speaker Kevin McCarthy make progress toward garnering the bipartisan support needed to pass this weekend’s debt limit deal. Equity futures are setting up for a strong open, Treasury yields are lower across the front and belly of the curve, and risk-sensitive currencies are climbing against the dollar.
Many investors remain wary: some of the proposed bill’s embedded provisions are expected to take a toll on growth, and the Treasury’s renewed funding efforts are seen subtracting from overall market liquidity.
We suspect these fears are likely overdone. Although there are some procedural landmines ahead that could impact the final wording, the impact on spending associated with the so-called “Fiscal Responsibility Act” should be almost unnoticeable from a macroeconomic standpoint, leaving the government’s biggest outlays essentially unchanged. And Treasury officials – along with their counterparts at the Fed – are well-practised in slow-walking issuance or otherwise minimizing disruption around funding surges. Instead, we think the ongoing deterioration in underlying credit conditions could have far more powerful effects on markets and the economy.
The Japanese yen failed to firm last night after officials engaged in half-hearted jawboning efforts, suggesting that volatility levels haven’t risen to the levels needed to prompt currency intervention. After a joint meeting between the Bank of Japan Ministry of Finance, and Financial Services Agency, Masato Kanda, vice minister of finance for international affairs, said “It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable”. In language that has historically signalled a relatively mild degree of concern, he warned “The government will continue to closely monitor market moves, and will take appropriate responses if necessary”. Persistently-wide yield differentials have pushed the yen back below the 140 threshold against the dollar, unwinding much of the gains achieved since December, when former governor Kuroda widened the trading band under the Bank of Japan’s yield curve control program.
The Canadian dollar is inching higher against the dollar – but gains could be limited ahead of tomorrow’s gross domestic product report. Investors expect the economy to show signs of slowing momentum in March and April, with public-sector union strikes exacerbating weakness in the private sector as ever-more-burdensome debt loads cut into consumer consumption. We think this will limit the likelihood of an overreaction among policymakers to recent inflation data, raising the bar to a final rate hike at the Bank of Canada’s next meeting – but, admittedly, this not a strong conviction view, and another move is certainly within the realm of possibility. The US-Canada pair’s 100-day moving average at 1.3500 could remain sticky for now.
Today is packed with mid-tier data releases. The latest edition of the Case-Shiller national home price index will land at 9, the Conference Board’s consumer confidence index is expected to fall to 99.0 in May from April’s 101.3 when it arrives at 10, and the Dallas Fed’s May manufacturing survey is seen posting a modest improvement at 10:30. The Richmond Fed’s Thomas Barkin will discuss monetary policy at 1.
Friday’s jobs numbers could add to a string of hotter-than-anticipated data releases in helping build the case for a rate “hike” or “skip” (we apologize for the terrible nomenclature used to describe these things) at the Fed’s upcoming meeting. After Friday’s strong personal consumption expenditures number, markets are putting circa-65-percent odds on a hike on June 14, with a move by July 26 considered a near certainty, with a move in the Fed Funds rate above 5.25 percent almost 78 percent priced in. If labour markets continue to defy expectations for a slowdown, yields could rise further, helping support the dollar against its major – and far weaker – counterparts.