President Biden and House Speaker McCarthy reach tentative US debt deal

President Biden and House Speaker McCarthy reach tentative US debt deal

• USD: US President Biden and top congressional Republican Kevin McCarthy reach a tentative deal over the weekend to raise the federal government's USD31.4trn debt ceiling. The deal would raise the debt limit for two years while capping spending over that time, claw back unused COVID funds, speed up the permitting process for some energy projects and include some extra work requirements for food aid programs for poor Americans. While details of the deal are yet to be released, press reports suggest that negotiators have agreed to cap non-defense discretionary spending at 2023 levels for one year and increase it by 1% in 2025, according to a source familiar with the deal.
• USD: With the debt deal having been announced, it now faces an equally difficult task of getting through the narrowly divided Congress before the US Treasury runs short of money to cover all its obligations at its newly announced X-date of June 5. President Biden and House Speaker McCarthy will need to carefully thread the needle in finding a compromise that can clear the House, with a 222-213 Republican majority, and Senate, with a 51-49 Democratic majority. McCarthy has vowed to give House members 72 hours to read the legislation before bringing it to the floor for a vote. That will test whether enough moderate members support the compromises in the bill to overcome opposition from both hard-right Republicans and progressive Democrats. Then it will need to pass the Senate, where it will require at least nine Republican votes to succeed. There are multiple opportunities in each chamber along the way to slow down the process.

Fed Minutes, Waller keep the June meeting live for “hike” or “skip”

• USD: Fed Minutes of the May FOMC meeting released mid last week show officials split on whether or not more hikes are needed. While inflation remains stubbornly high particularly core PCE, FOMC members are starting to weigh the rising economic risks from the recent regional bank turmoil.  Participants generally express uncertainty about how much more policy tightening may be appropriate. The minutes show Fed officials stressing the need to be data dependent, though also indicating that the statement shouldn’t be interpreted as signaling rate cuts or ruling out further hikes. Some participants are torn between hiking further or “skipping” a meeting as they balance upside risks to inflation with downside risks to growth, including from tighter lending standards. But several participants also note that if the US economy evolves along the lines of their current outlook, then further policy firming after this meeting may not be necessary. Fed staff forecasts also reiterate their forecast for a “mild recession” starting later this year, followed by a moderately paced recovery. Fed Governor Waller however, is more explicit in his comments – indicating strong core PCE and CPI inflation could have him supporting a hike in June, while softer readings would argue for a “skip”,  though careful to point out that risks to higher inflation must be balanced with downside risk from credit tightening.

Stably strong core PCE inflation raises odds of a 25bp hike in June/ July

• USD: In data released Friday, US core PCE inflation rises 0.38%MoM in April and climbs to 4.7%YoY from 4.6%, above consensus for a 0.3%MoM increase and 4.6%YoY. Core non-shelter service prices also rise a strong 0.43%MoM compared to a 0.11% increase in these prices in CPI. The data highlights persistence of still too high inflation, with core non-shelter services prices stably rising at a ~5% annualized pace for close to 2 years. An even higher YoY core PCE inflation also means it is likely the Fed’s year end inflation forecasts may be revised higher in June. Fed’s current 3.6% core PCE forecast would imply a roughly 2.8% annualized pace throughout the rest of this year. Such a steep slowing seems unlikely and a realization of stably too high inflation could prompt a further 25bp hike at the June (less likely) or July (more likely) meeting.
• USD: A key issue in upcoming US inflation data prints though is that inflation measured by CPI will likely slow faster than PCE inflation. This is due to differences in weightings of shelter prices, which should continue to moderate over the coming months, and non-shelter service prices, which may remain stably strong until later in the year.

US PMIs point to services sector resilience for now

• USD: In data released earlier this week, US Manufacturing PMI declines to below the 50 level to 48.5 in the May preliminary release.  The sub-index with the highest weight (new orders), declines by 3 points to 47.1 and the output index also declines to 51.0, remaining just slightly above 50. The employment index barely changes at 53.4 and the output prices index declines by a large 6.4 points to 50.9. Meanwhile, the US Services PMI rises to 55.1 from 53.6, contrary to expectations for a modest decline, the fifth consecutive monthly increase and reaching its highest level since April 2022. The new business index increases to 55.6 from 52.3., the employment index continues to rise to 53.8 from 52.7 and backlogs of work index once again declines after a few months of increases towards the end of last year. The output prices index however, declines modestly but to still high levels of 57 from 58.5.
• USD: For much of last year, the Services PMI had dropped to below-50 and reached its lowest recent level of 43.7 in August 2022. This however, was not in line with hard services consumption data, and also inconsistent with ISM Services PMI that showed services activity continuing to grow during that period. Similarly, the recent strength in S&P Services PMI could also be discounted as exaggerating the strength of the US services sector as it has likely become a less reliable indicator of activity in recent years. Goods consumption on the other hand, has been moving sideways in real terms and it is not surprising to see manufacturing activity outside of some transportation goods on the weaker side. The employment indices for both manufacturing and services, while somewhat lower than the peak of recent years, remain above 50, indicating businesses continue to hire workers. The fall in the manufacturing price index in May is also not all that surprising as these prices are sensitive to commodities prices such as oil and gasoline that seem to have normalized.

Week Ahead: US May Nonfarm Payrolls, JOLTS April Job openings, May ISM Manufacturing, May Conference Board Consumer Confidence, Euro area May HICP, Australia April Monthly CPI YoY, May CoreLogic House Price Index, Canada Quarterly GDP Annualized (Q1), and China Manufacturing PMI May

• USD: US May Nonfarm Payrolls – Citi: 200k, median: 180k, prior: 253k; Private Payrolls – Citi: 160k, median: 158k, prior: 230k;  Average Hourly Earnings MoM – Citi: 0.3%, median: 0.3%, prior: 0.5%; Average Hourly Earnings YoY – Citi: 4.3%, median: 4.3%, prior: 4.4%;  Unemployment Rate – Citi: 3.4%, median: 3.5%, prior: 3.4% - Citi Research expect a 200k increase in nonfarm payrolls in May, with private payrolls rising by a softer 160k. However, despite strong labor demand, a shrinking pool of available workers to hire could still limit monthly job gains which could see job growth likely to continue to slow. Citi Research expect average hourly earnings to rise by a more modest 0.3%MoM in May after having risen a substantial 0.5%MoM in April and the unemployment rate to remain unchanged at 3.4% in May with balanced risks.
• USD: JOLTS April Job Openings – Citi: 9630k, median: NA, prior: 9590k - job openings should move essentially sideways in April, increasing very modestly from 9.59 million to 9.63 million. This would be consistent with high frequency data such as from Indeed.com that shows openings continuing to moderate, but only very slowly. A modest increase to 9.63 million openings in April would imply the ratio of job openings to unemployed persons rises from 1.6:1 to 1.7:1. This ratio has been stably in a 1.6-2 range since the end of 2021.
• USD: US May ISM Manufacturing – Citi: 46.6, median: 47.0, prior: 47.1 – Citi Research expect a slight moderation in ISM Manufacturing to 46.6 from 47.1, slightly above the recent bottom in March. Weakness should come from the two main components - new orders and production, while the employment index should remain just slightly above 50 as companies are hesitant to lay off workers amidst a still-tight labor market. There is also likely to be some moderation in prices as commodities like oil and gasoline have declined after surging in April. Manufacturing should stay weak outside of transportation goods as demand for those categories moves sideways in real terms before contracting later this year, in our view.
• USD: US May Conference Board Consumer Confidence – Citi: 98.0, median: 99.9, prior: 101.3 – Citi Research expect continued moderation in the Conference Board Consumer Confidence Index to 98.0 from 101.3. Weakness should come  from the Expectations index as consumers feel more worried about potential recession sometime in the next few quarters. Citi Research expect more downside for consumer confidence in the coming quarters as the labor market starts to weaken.

• EUR: Euro area May HICP - headline inflation should make another major step down in May as base effects in energy kick in, down to 6.3% from 7.0% in April. Citi Research project core HICP inflation to also have eased from 5.6% to 5.5% YY, with a sub-trend 0.2% MM gain in seasonal adjusted terms, with temporary factors behind the drop. The team though sees core CPI re-accelerating in June following the acceleration in negotiated wages in 1Q to 4.3% and likely to pick up further in 2Q.

• AUD: Australia April Monthly CPI YoY: Citi forecast; 6.2%, Previous; 6.3% - the first month of the quarter for the CPI focusses on prices for food, housing (rents and new dwelling purchases) and housing equipment and furnishings. On services inflation (excl. shelter), only around 19% of the CPI services inflation is covered in month 1 of the quarter. The key components will be household furnishing costs, clothing and holiday accommodation and travel. These components had a large fall in January, and if that drop is repeated, then there are likely to be downside risks to the Q2 CPI print. However, the monthly CPI also showed that these prices had stabilized after the first month of the year, so there could hawkish risks for the RBA if these prices re-accelerated in April and beyond.
• AUD: Australia May CoreLogic House Price Index: Citi forecast; 0.9%, Previous; 0.7% - despite the RBA delivering a surprise +25bp change to the cash rate target, demand and supply dynamics continue to point to further gains in capital city house prices. Citi Research expect the monthly CoreLogic data to show a 0.9% increase in May, for a 2.3% QoQ change and reducing the YoY decline from -8.4% to -7.3.
• CAD: Canada Quarterly GDP Annualized (Q1) – Citi: 3.0%, median: 2.5%, prior: 0.0% - after a quarter of 0% real GDP growth in Q4-2022, Citi Research expect a strong rebound in activity of 3.0% in Q1, with details more supportive of continued strong demand. Flat GDP in Q4 masked a modest 1% increase in final private domestic demand, with an even stronger increase in domestic demand expected in Q1. Goods consumption should rise further in Q1 in line with rising retail sales, and the team also expects a solid increase in services consumption. Citi Research also expect a strong boost to growth from net exports, which unlike in Q1 should be largely a result of rising exports as opposed to falling imports. However, business investment could again be on the softer side in line with declines in certain imports, but a drag from residential investment in Q1 is likely to be the last for some time. Overall, stronger-than-expected Q1 GDP (the BoC’s latest forecast is for 2.3% growth) and signs of a still-solid Q2 should leave the BoC convinced that activity has been persistently stronger in H1 than thought when the BoC signaled an upcoming pause at the January meeting (when the Q1 GDP growth forecast was just 0.5%). Q1 GDP will be the last key data point ahead of the June 7 BoC meeting, and is likely to reaffirm a 25bp rate hike.

• CNH: China Manufacturing PMI May: Citi Forecast 49.5, Consensus 49.2, Prior 49.2 – the industrial sector continued to be soft in May especially for heavy sectors. Heavy sectors such as asphalt and cement have been sluggish with subdued operation rates. The low base in April may send the May reading higher, but Citi Research do not see much chance for the number to return to the expansionary regime.