US House and Senate reach agreement to raise debt ceiling

KUWAIT: The US dollar index fell on the week, last trading around 104.01.EUR/USD decreased to close at 1.0706, while GBP/USD increased by0.91% ending the week at 1.2448. USD/JPY fell below the 140.00 threshold this week, last trading at 139.91. Meanwhile, equities closed mixed this week. The S&P 500 gained 3.04% while the Nikkei 225 also increased 0.43%. Finally, the Euro Stoxx 50 edged lower by 0.40%. United States US consumer confidence reaches 6 month low Consumer confidence in the United States fell to a 6-month low, after the Conference Board index came in at 102.3 in May, slightly below the previous print of 103.7.

The report revealed growing uncertainty around the economy, specifically as it relates to employment and future expectations. Ataman Ozyildirim, Senior Director of Economics at The Conference Board stated, “Consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy.” The assessment of employment conditions saw the biggest drop, with consumers reporting that jobs are ‘plentiful’ falling 4% from 47.5% in April to 43.5% in May. Finally, Ozyildrim added, “consumers also became more downbeat about future business conditions, weighing on the expectations index.”

US labor market tight & robust Job openings in April surprised to the upside, with openings at their highest level since January. The JOLTs job openings report revealed 10.1 million job openings versus 9.8 million in March and 9.4 million as an expected figure. The non-farm employment report further supported the idea of a robust labor market, after 339K jobs were added to the US economy versus an expectation of 193K and previous figure of 294K. This was driven by gains in sectors such as professional business (64K), government (56K), healthcare (52K), and hospitality (48K).

Despite this, the unemployment rate ticked up to 3.7% from 3.4% previously as more people started to look for work. Average hourly earnings dropped to 0.3% monthly from 0.4% previously, representing a drop to 4.3% from 4.4% previously on an annual basis. The strong labor market data is not enough to alter market expectations, which overwhelmingly favors a pause in rate hikes at the upcoming FOMC meeting. Fed official signals pause The latest remarks from Federal Reserve governor Philip Jefferson show that he supports a pause in rate hikes for the upcoming FOMC meeting.

Commenting on interest rates, Jefferson said, “skipping a rate hike at a coming meeting would allow the [FOMC] to see more data before making decisions about the extent of additional policy firming.” However, he did warn that a pause to assess the effects of rate hikes does not necessarily mean that they “have reached the peak rate for this cycle.” US leaders reach debt ceiling agreement Following a period of intense negotiations, President Joe Biden and the Republicans led by Kevin McCarthy have reached a debt ceiling deal prior to the deadline.

The agreement would see the debt limit suspended until January 2025, meaning President Biden would not have to deal with a deadlock and the politics surrounding it in a pivotal election year for 2024. Furthermore, the agreement sees Biden and democrats retain all the clauses in the Inflation Reduction Act, a victory for them in an economic and climate sense as Republicans have long tried to alter or repeal the act. Despite this, the Republicans have also gained major traction. The deal ensures that non-defense spending will remain flat for 2024, and will increase by a capped 1% in 2025 and for the next six years. Additionally, the agreement involves an expedited gas pipeline in West Virginia that Democrats have long opposed.

There will also be cuts to the IRS, COVID relief funds, and an expansion in work requirements, which could see millions lose access to food stamps. Instead, House Republicans ensured that the deal would see full funding for military veteran’s health care and would expand the PACT Act’s toxic exposure fund. Finally, the deal would guarantee that student loan repayment would resume at the end of the summer following Biden’s decision to pause it during the height of the COVID pandemic in 2020.

However, Republicans were not able to repeal Biden’s plan to provide up to $20,000 in debt relief for qualified student borrowers and his income-driven repayment plan that benefits lower-socioeconomic households. The US House passed the debt-ceiling bill with a 314-117 majority vote. Several lawmakers, including Democrat Bernie Sanders opposed the deal, saying that “[he] cannot in good conscience, vote for the debt ceiling deal.” Despite this, the Senate also voted to pass the resolution, thus ending the debt-ceiling dispute for the next year and a half. The dollar weakened over the week against a basket of other currencies, with the US dollar index last trading around 104.

Europe Euro zone Inflation Cools Annual CPI inflation in the Eurozone fell to 6.1% in May from 7.0% previously, beating market expectations of 6.3%. Furthermore, annual core CPI dropped to 5.3% in May from 5.6% in April, again beating expectations of 5.5%. The bloc’s largest economies, Germany and France, saw noticeable slowdowns in regards to the pace of price growth. Despite this, ECB President Christine Lagarde signaled that there is still “ground to cover to bring interest rates to sufficiently restrictive levels.”

Markets are still pricing in a 25bps hike by the European Central Bank next meeting following the release of CPI data and Lagarde’s comments. The EUR/USD currency pair ended the week lower, last trading at 1.0706. Asia Pacific China Manufacturing PMI Ignites Fears of Global Slowdown in Growth China’s disappointing recovery from lifting COVID restrictions continues, as factory activity falls more than expected with the manufacturing PMI coming in at 48.8 versus the previous print of 49.2. This is the second time in a row China faced a sub 50 print, indicating a contraction in the manufacturing sector.

Furthermore, the reading is the weakest since December when China started lifting COVID restrictions. Meanwhile, non-manufacturing PMI came in at 54.5 from 56.4 previously, slightly lower than forecasts yet following the trend of their peers in the United States, Europe, and the UK with services in expansion territory while manufacturing contracts. The recent lower than anticipated prints are feeding the narrative and worries of a weakening global economy in the face of elevated inflation and interest rates.

Markets will keep an eye on further economic data to gauge the direction of the global economy, with signs of weaknesses indicating that global tightening cycles are closer to the end. Australia inflation accelerates in April Consumer prices in Australia rose more than expected, with annual CPI for April coming in at 6.8% from 6.3% previously, noticeably higher than the forecasted figure of 6.4%. Core inflation meanwhile was up 6.5% in the year for April, down from the previous print of 6.9%.

The increase in the headline figure was driven mainly by increases in housing as well as a jump in fuel prices. The surprise in inflation figures raised pressure on the Reserve Bank of Australia to deliver a rate hike. Markets are slightly favoring a pause by the RBA, however the odds of a rate hike increased to 45% following the report. The AUD/USD currency pair managed to close the week higher at 0.6611. Kuwait Kuwaiti Dinar USD/KWD closed last week at 0.30735. Rates – 4th June, 2023

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