flg-icon English (India)
Wall Street jumped on hopes of an imminent US debt deal

Wall Street jumped on hopes of an imminent US debt deal

calendar 26/05/2023 - 21:56 UTC

On Thursday, Dow Future recovered almost +300 points from around 32619 in late-day trading and made a high around 32912 before closing around 32795 on hopes & hypes of an imminent US debt deal and less hawkish talks by Fed’s Collins. Tech-savvy Nasdaq surged +2.55% on Nvidia boost amid AI chip optimism. But late Thursday, US House Speaker (Majority Leader) McCarthy (Rep) clarified that they were not able to reach the debt deal, but hopes for the same by weekend/Tuesday.

Late Thursday, the US House Speaker McCarthy said:

·         We do not have a deal on the debt ceiling

·         It's difficult, but we're working and will keep working till we finish

·         There is no agreement on the debt ceiling

On early European Friday, Dow Future made a session low around 32734 briefly from overnight closing levels of 32800 and then surged again to almost 32883 on hopes & hypes of an imminent US debt deal. Nasdaq also surged on tech/Nvidia boost after a report that JP Morgan (JPM) is developing a ChatGPT-like service. But Dow Future also briefly slips around -100 points from around 32890 after hotter-than-expected US core PCE inflation and consumer spending. Gold also slumped from around 1957 to 1937, while USD/US bond yield surged as the market discounted a higher probability of another +25 bps hike in June.

But Dow Future soon recovered after the knee-jerk reaction on hopes & hypes of an imminent US debt limit deal as the daily political soap opera begins:

·         US Deputy Treasury Sec. Adeyemo: We don't have a plan B that allows us to meet commitments to creditors

·         US Deputy Treasury Sec. Adeyemo: The 14th Amendment cannot solve our challenges now

·         US Deputy Treasury Sec. Adeyemo: I hope the US is not on a path to downgrade

·         Republican GOP Graves: No progress made in debt ceiling talks after 7:30 P.M. ET on Thursday

·         US Deputy Treasury Sec. Adeyemo: We're making progress on the debt ceiling

·         House Rep. Speaker McCarthy: Talks also made progress this morning

·         House Rep. Speaker McCarthy: I will continue to work today on the Debt Ceiling

·         House Rep. Speaker McCarthy: I have not spoken to Biden in the last 24 hours

·         House Rep. Speaker McCarthy: This is just the start generally on spending

·         House Rep. Speaker McCarthy: Talks come down to one thing and that's spending

·         House Rep. Speaker McCarthy: I think they made progress last night on the Debt ceiling

·         House Rep. Speaker McCarthy: Talks also made progress this morning

·         House Rep. Speaker McCarthy: I will continue to work today on the Debt Ceiling

·         GOP Rep. McHenry: A debt ceiling deal can come together, or go the other way

·         GOP Rep. McHenry: A deal needs to be made in the next day, or two, or three

·         GOP Rep. McHenry: A debt-limit deal has got to come together

·         Democrats see a two-Year debt limit expansion taking shape in negotiations with Republicans. Nothing is finalized yet

·         Biden Administration Official: A debt ceiling deal is possible today, but could easily slip into the weekend

·         GOP Negotiator Graves: We continue to have major issues with the debt ceiling, and have not bridged the gap

·         GOP Negotiator Graves: The GOP is not budging on demand for new work requirements

·         GOP Rep. McHenry: There aren’t any in-person meetings with the White House scheduled today that I know of

·         US Treasury Secretary Yellen: Projected resources will be inadequate during the week of June 5, when $92 bln of payments and transfers are due

·         US Treasury Secretary Yellen: The Treasury will make more than $130 bln of scheduled payments in the first two days of June, including payments to veterans, social security and Medicare recipients

·         US Treasury Secretary Yellen: The US could default as early as June 5 without a debt ceiling hike, the previous date was June 1

Late Friday, U.S. Treasury Secretary Yellen announced the department expects to be able to make payments on US bills up until June 5, buying time for debt ceiling talks amid an extended weekend holiday (Monday Memorial Day holiday in the U.S.). It comes after White House and Republican negotiators appeared to be closing in on a compromise agreement to raise the debt ceiling for two years but were still negotiating hard Friday to resolve various issues including deficit spending.

On Friday, Fed’s Mester said after the U.S. core PCE inflation came hotter than expected:

·         My path for the fund's rate is to raise and hold for a time

·         I do think we're going to have to tighten a bit more

·         Core services ex-housing inflation remains stubborn

·         Right now is the hard part for monetary policy decisions

·         Today's data suggest the Fed has more work to do

·         The Fed mustn't under-tighten monetary policy

·         I don't know exactly how tight monetary policy is right now

·         Not at the point yet where the next move could be up or down

·         The US economy is resilient

·         The economy has slowed quite a bit relative to last year

·         Focus is now on tightening credit standards

·         I haven't seen much of a sign that banking stress is affecting credit conditions

·         I still support a Fed funds rate of over 5%

·         Everything is on the table at the June meeting

·         I won't prejudge the outcome of the June FOMC meeting

·         Fed has made slow progress on inflation. It's concerning

·         The Fed must look at all the data that's coming in

·         I might have to revise my inflation forecast for Fed forecasts

·         Tighter monetary policy is still feeding into the economy

·         PCE inflation data underscored slow progress on inflation

·         Everything is on the table for the June FOMC

·         Data confirming inflation is still too high

Meanwhile, IMF said in its latest forecast:

·         Core US inflation will continue to fall during 2023, but remain materially above the 2% Fed target throughout 2023 and 2024

·         Strength in the US demand and labor market means a persistent inflation problem

·         US unemployment is to rise slowly to close to 4.5% by end-2024

·         The US economy has proven resilient in the face of significant fiscal and monetary tightening

·         We expect US growth to be around 1.2% in 2023, picking up momentum later in 2024

·         IMF's Managing Director Georgieva: US interest rates will need to be higher for longer

·         IMF sees the Fed funds rate at 5.25% to 5.5% until late 2024

Apart from ongoing debt limit drama, on Friday, some focus of the market was also on U.S. core PCE inflation for April, the Fed’s preferred gauze of price stability. The BEA flash data shows seasonally adjusted U.S. core PCE inflation inched up to +4.7% in April from +4.6% sequentially and higher than the market consensus of +4.6% (y/y).

On a sequential basis (m/m), the seasonally adjusted U.S. core PCE inflation surged +0.4% in April from +0.3% in March and above the market expectations of +0.3%.

Overall, the 3M rolling average of US core PCE inflation is now running around +4.6% against core CPI inflation of +5.6% and the average core inflation (PCE+CPI) is now around +5.1%, still substantially above Fed’s +2.0% target. As Fed may keep the so-called R* (real neutral rate) around +1.0%, the ideal terminal rate may be around +6.0%. Thus Fed is now talking about a 5.0-6.0% (lower-upper) range of restrictive terminal rate and Bullard called for at least a +5.50% restrictive terminal rate for the time being. If U.S. core inflation still does not come down substantially, then Fed may even go for +6.00% terminal repo rates by Dec’23; Fed may give pause in July and November to assess the impact of higher rates on inflation and the labor market.

On Friday, blue-chip Dow Future (DJ-30) surged +0.99%, broader SPX-500 surged +1.43%, while tech-savvy NQ-100 (Nasdaq) jumped +2.84% amid AI optimism; Marvell soared after upbeat guidance due to AI technologies, in line with Nvidia on Thursday. Further, retailer GAP jumped on earnings beat.

On Friday, Wall Street was boosted by techs, consumer discretionary, communication services, real estate, industrials, banks & financials, materials, and consumer staples, while dragged by energy, healthcare, and utilities to some extent.


Expect a last-minute debt deal/breakthrough by the weekend and by 2nd June after the political war of attrition gets over in line with respective political compulsions. Both Democrats and Republicans would be squarely blamed if there is any real U.S. debt default and subsequent chaos in the financial market. The US has raised the debt ceiling 78 times since 1960 and has never once defaulted while continuing the vicious cycle of huge deficit spending, borrowing, and printing without causing much inflation thanks to China’s cheap export from the 1980s (after China joined WTO). The global reserve currency status of USD is also a great advantage for ‘Uncle Sam’; everyone/country needs USD as it’s the ‘king’ and thus USD is always in demand despite almost 24/7 printing by the Fed; EUR and Chinese Yuan are far behind USD as far global reserve currency status is considered.

The U.S. is now paying around 9.5% of its tax revenue as interest on public debt and can’t afford to increase the same well into double-digit around Japan’s 15%; China and Europe are now paying around 5..5% of revenue as interest on the public debt (deficit spending). Thus the Fed has no option but to pause soon after a possible hike in June but Biden admin also has to reduce elevated inflation by fiscal action.

Apart from monetary action to reduce demand, the U.S. also needs proper/targeted fiscal stimulus/action to increase the supply side of the economy. But such supply-side reform/stimulus needs bipartisan political agreement, whereas present political and policy paralysis is hampering such initiative. Biden admin (Democrats) is now a minority government and has to depend upon the political whims & fancies of opposition Republicans. The same was true when the Republican Trump admin was turned into a minority government after two years of the mid-term election. The U.S. needs some political/legislative reform to allow a stable government to operate for at least 4/5 years (like India) without causing political & policy paralysis year after year.

At the present run rate, U.S. core CPI may take another 6 months; i.e. Sep’23 to fall to around +5.0% and Sep-Dec’24 to further fall around +4.0%, still substantially higher than Fed’s +2.0% targets. Thus Fed needs to keep the real interest rate restrictive /positive enough for a longer period, so that core inflation falls towards +2% targets by Dec’25. Fed may keep the repo rate at 5.50% by June for a real positive U.S. interest rate. Fed should have communicated earlier in a clear way that a real positive interest rate is the basic requirement for ensuring price stability along with supply-side actions by the fiscal authority/government (including peaceful resolution of the Russia-Ukraine/U.S./NATO proxy war).

Fed was already behind the inflation curve from early 2021 when the economy opens fully after the 2020 COVID disruption. Fed should have started to normalize its ultra-loose monetary policy in early 2021 rather than terming higher inflation as transitory and starting the process (telegraphing about QE ending and potential rate hikes) in late 2021. In the process, Fed created synchronized global inflation/stagflation as almost all major G20 central banks usually follow Fed policy action for currency (USD) and bond yield differential. The late action of the Fed coupled with supply chain issues and policy paralysis in the White House created synchronized elevated sticky core inflation globally (except in China).

Fed increased the repo rate by +500 bps in the last year, whereas core inflation was reduced only by -100 bps, in line with a 2Y bond yield increase of about +150 bps. The market is expecting a rate cut by Fed by almost -100 bps by Dec’23 despite Fed trying to pour cold water on that market expectation. The U.S. paid around 9% of its revenue last year as interest on public debt and can’t afford to increase the same well into double-digit around Japan’s 15%; China and Europe are now paying around 5.5% of revenue as interest on the public debt (deficit spending). Thus the U.S. has no option but to pause soon after a possible hike in June but to also reduce elevated inflation by both monetary and fiscal action.

Bottom line:

Fed may hike +0.25 bps in June for a terminal repo rate of +5.50% and go for pause (not pivot) in July and September to assess the impact of higher rates on inflation and the labor market; if core inflation still doesn’t drop substantially, then Fed has no option but to go for another +25 bps hike in November and December for a terminal repo rate +6.00%.

The materials contained on this document are not made by iFOREX but by an independent third party and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results. For the full disclaimer click here.

Want to learn more about CFD trading?

Join iFOREX to get an education package and start taking advantage of market opportunities.

A beginner's e-book A beginner's e-book
$5,000 practice demo account< $5,000 practice demo account
A 12-part video course A 12-part video course
Register now