Macro intelligence: Debt ceiling crisis derailed; US braces for ripple effects

_{Written by Kyle Rodda, ausbiz}

The US economy has once again been brought to the brink of default.

In this week’s Macro Intelligence, we look at the deal to lift the debt ceiling and what might move the markets from here.

US default: a crisis averted?

US President Joe Biden and the Speaker of the House of Representatives Kevin McCarthy struck a “deal in principle” last weekend to lift the debt ceiling. If it passes Congress, the deal will see the debt ceiling lifted until January 2025.

In exchange, the Biden administration has agreed to keep non-defence spending roughly flat next year, which some suggest will reduce spending by almost $US1 trillion.

A smooth passage through Congress is not guaranteed.

There remains speculation hard-line Republicans and Democrats may oppose the bill containing the deal, with the former wanting more aggressive spending restrictions and the latter opposing the curbs on future spending.

Market participants are pricing in a lower risk of default now. The rate on the 1-year US sovereign credit default swap – the price of insurance an investor pays against a US government default – has dropped from recent highs.

However, it remains historically elevated and much higher than during the 2011 debt ceiling stand-off.

1-year US sovereign credit default

Inflation: Still public enemy number one

While a deal on the debt ceiling removes one massive tail risk from the market, it only shifts attention back to the issue of elevated inflation. Based on the most recent inflation data out of the US, price growth remains high and increasingly sticky.

The PCE Price Index, the Fed’s chosen inflation gauge, was released last week and revealed core inflation rose by 4.7% year-over-year in April. The increase was higher than the 4.6% expansion expected and the 4.6% increase the month prior.

PCE price index

Sticky inflation is becoming more apparent in several economies across the globe. The UK’s CPI data was released last week and showed a surprise increase in core CPI, jumping from 6.2% to 6.8% year-over-year.

Attention turns to May NFPs

Traders shift focus to Friday’s Non-Farm Payroll figures as fears around the debt ceiling subside and risks to the inflation outlook ratchet up.

Economists are forecasting the US economy added 191,000 jobs in May, with the pace of hiring slowing in the economy. The relatively modest increase in employment is tipped to push the unemployment rate higher to 3.5%.

Most important, however, is wage growth, as tight labour market conditions continue to put upward pressure on worker pay. Expectations are for a moderation in month-over-month wage growth to 0.3% from 0.5%.

Nonetheless, annual wage growth is forecast to remain sticky at 4.4%.

Annual wage growth

Markets poised for another Fed hike

The US Federal Reserve next meets to set policy on June 14th.

According to the CME’s Fed Watch tool, another 25 basis point rate hike from the Fed is considered a 63% probability. This is up from before the PCE Price Index release and despite recent guidance from the central bank that it will pause at the June meeting.

A stronger-than-expected Non-Farm Payroll Report, and signs of persistent wage growth, could stoke further speculation of a hike in June.

The deal to raise the debt ceiling appears to have led traders to price-out rate cuts by the end of this year. A cut before the end of 2023 is now considered only a 50-50 prospect, compared to weeks ago when nearly 75 basis points of cuts were implied in the curve.

Target rate probability

Three markets to watch

• US dollar

The impasse on the US debt ceiling appeared primarily positive for the US dollar.

In the short term, a break of trendline support risks a pullback in the Greenback. However, a break of longer-term trendline resistance at a potential bottom indicates a possible trend reversal. A push beyond the 200-day MA would signal further dollar strength.

US dollar daily chart

• Gold

Gold prices have pulled back in May after surging throughout the start of 2023.

The commodity’s price has hit trendline support, and buyers have swept in to defend the 100-day moving average. A break below bother could see gold push below $US 1900.Significant resistance resides above $US 2000.

Gold daily chart

• NASDAQ

The NASDAQ has bucked any concern about a US default as artificial intelligence mania drives tech stocks higher.

The index is meeting resistance at 14,300, and the daily RSI is signalling overbought conditions, a loss of momentum, and an imminent pullback. Support could be found around 13,700in the event of a sell-off. The next level of resistance is 15,000.

NASDAQ daily chart