The debt ceiling charade is all over.

This was the 79th time it’s been raised since 1960 and the US still hasn’t defaulted. Remember that next time.

The US has averted a major economic crisis by raising its debt ceiling as part of a new two-year budget agreement that echoes the structure of the past three such deals. The agreement keeps non-defense spending roughly flat for the current fiscal year and 2024 and removes budget caps after 2025.

The spending levels reached reflect those the Biden administration had negotiated at the end of the last calendar year, thereby averting a potentially catastrophic 22% cut in non-defense discretionary priorities and a decade-long set of caps. The budget deal includes full funding for veterans‘ medical care and elevates funding for the toxic exposure fund over 2024 levels.

Despite Republican requests, the agreement does not incorporate any alterations to Medicaid. It does, however, modify SNAP (food stamp) aid time limits, gradually implementing and then sunseting them for recipients up to age 54. Additionally, reforms are introduced to lower the number of vulnerable people of all ages subject to time limits.

The Inflation Reduction Act funding remains intact for clean energy funds for low-income Americans and pollution cleanup. As the US Supreme Court considers a significant student debt case, the resumption of student loan payments has been put on hold.

The agreement has a few stipulations for lower-income Americans, including the introduction of extra work requirements. There’s uncertainty around funding for the IRS, but House Minority Leader Kevin McCarthy announced there are no new taxes or programs in the deal. He hailed it as achieving ‚historic reductions in spending‘.

They’re calling it an ‚agreement in principle‘ so there’s always a chance some renegades could derail it but here are the main points:

• Keeps non-defense spending ‚roughly flat for current fiscal year and 2024
• Structure of two-year US budget deal is consistent with agreements reached during last three debt limit battles
• There are no budget caps after 2025
• Agreed-upon spending levels reflect what Biden admin had negotiated at the end of the last calendar year
• Averts a 22% of non-defese discretionary priorities and 10 years of caps
• Fully funds veterans medical care and increases funding for toxic exposure fund over 2024 levels
• Includes no changes to Medicaid that had been sought by Republicans
• Phases in and then sunsets SNAP (food stamp) aid time limits to people up to age 54
• Also includes reforms reducing number of vulnerable people of all ages subject to time limits
• Inflation Reduction Act funding preserved for clean energy funds for lower income Americans and pollution cleanup
• Student loan payments will not resume while US Supreme Court considers student debt case
• It includes some extra work requirements for the poor
• It’s not clear if funding for the IRS has been cut
• McCarthy says no new taxes or programs in the deal and that it has ‚historic reductions is spending‘

I can’t see anything here that will move markets. Bitcoin rose about $300 after the deal so I take that as a sign of ‚risk on‘ for markets but a deal should have been largely priced in before the weekend.

This article was written by Adam Button at www.forexlive.com.

A debt ceiling deal isn’t done yet but it’s safe to trade as if it is. Here are the latest comments from US House majority leader Kevin McCarthy.

• We do not have a deal yet
• June 5 date doesn’t change things
• We’ll get debt ceiling deal when it gets right
• Have not dropped permitting reform from debt ceiling negotiations
• ‚Firmly believe‘ all Americans will like debt ceiling bill
• Can meet June 5 deadline

I don’t doubt there will be one more scare as the details are hammered out but — like I’ve said from the beginning — the US was never going to default and this whole thing is the longest-running joke in politics. Here’s a poem that captures my feelings with some help from ChatGPT:

In the heart of the nation where the star-spangled flies,
A cycle persists, underneath the blue skies.
A dance as old as time, with a tune familiar,
A tale of market fears that feel peculiar.

Through the halls of power, a debate is heard,
Over numbers and figures, every single word.
Every few years, when the ceiling is near,
The markets tremble, succumbing to fear.

As the debt approaches the rigid, set cap,
The nation holds its breath, bracing for a mishap.
Market bears and bulls, they squabble and fight,
In the shadow of potential default’s twilight.

From Wall Street to Main, fears wildly grow,
As the words of doom in the media flow.
„Default,“ they whisper, with a chilling dread,
But history’s lessons are often left unread.

For since ’60, the count stands at seventy-eight,
Times when the nation was in a similar state.
Each time, the ceiling, it rose once more,
And the wolf was banished from the door.

In Congress, they bicker, and the clock ticks on,
But in the eleventh hour, an agreement is drawn.
The ceiling rises, the fears allay,
The United States pays its dues, saves the day.

Market’s heartbeat stabilizes, sighs a relief,
As the nation escapes the defaulting grief.
It’s a dance we’ve danced, again and again,
A well-worn path, known by market men.

So as the fears rise, with the ceiling in sight,
Remember the cycle, in the soft moonlight.
For although it teeters on a precarious ledge,
The US always steps back from the edge.

This article was written by Adam Button at www.forexlive.com.

• US April PCE core inflation 4.7% vs 4.6% expected
• US April durable goods orders 1.1% versus -1.0% expected
• US advance good trade balance $-96.77 billion versus $-85.7 billion expected
• US April wholesale inventories -0.2% vs +0.0% expected
• Fed’s Mester: Fed has made slow progress on inflation. It’s concerning
• Republican House negotiator says ‚major issues‘ still not worked out on debt ceiling
• Atlanta Fed GDPNow tumbles to 1.9%
• ECB’s Makhlouf: Haven’t seen wage settlements that raise concerns on a eurozone level
• Dallas Fed April trimmed mean PCE price index +4.4% vs +3.8% prior
• Canadian government fiscal year deficit cut in half
• Goldman Sachs and BofA see a ‚close call‘ on June Fed but market now sees 70% hike odds
• Euro longs retreat in the latest week of CFTC data
• Baker Hughes total rig count down -9 in the current week
• IMF sees US growth at 1.7% this year and 1.0% in 2024
• IMF raises Italy’s 2023 GDP forecast to 1.1% from 0.7%

Markets:

• WTI crude oil up 96-cents to $72.79
• Gold up $6 to $1946
• US 10-year yields flat at 3.81%
• S&P 500 up 1.4%
• GBP leads, JPY lags

The odds of a June Fed hike have risen to 70% from 50% today and that tells the story in FX, with the dollar gaining, though not exactly in a straightforward way. Both the pricing numbers and the consumption numbers were hot in the PCE data and the big winner was USD/JPY, which hit a new high for the year.

Initially it was a broad USD rally but it was more back-and-forth later as the market also weighed the stronger economic prospects. Flows into US tech are also a seemingly-unstoppable force as well, with the Nasdaq gaining another 2.2% on the AI boom.

The pound managed to hold off the US dollar but fell 90 pips from its highs before bouncing late.

Monday is a holiday in the US so there was some position squaring into the weekend, particularly in bonds as longs didn’t want to be caught offside on a debt ceiling deal and a wave of Treasury issuance. Yellen pushed back the deadline to at least June 5, so the charade may go on for another week.

The bigger story though is that the dollar appears to be breaking out on a number of fronts and there’s no US weakness yet in the data. Will next Friday’s non-farm payrolls report change that? Tune in to find out.

Have a good (long) weekend.

For those in the UK and US.

This article was written by Eamonn Sheridan at www.forexlive.com.

Treasury Secretary Janet Yellen has conjured a few extra days for US politicians to grandstand. She now says that extraordinary measures won’t be exhausted until at least June 5.

House Republican leader McCarthy has said his deadline is June 1 but you can never trust a politician.

In any case, a deal will get done and the US won’t default, the same as always. I think the market has already moved on.

This article was written by Adam Button at www.forexlive.com.

There were non-stop flows into US stock markets on Friday, led by the Nasdaq:

• S&P 500 +1.3%
• Nasdaq Comp +2.2%
• DJIA +1.0%
• Russell 2000 +1.1%
• Toronto TSX Comp +0.8%

On the week:

• S&P 500 +0.3%
• Nasdaq Comp +2.4%
• Russell 2000 flat
• Toronto TSX Comp -2.1%

Broadcom was a big winner on Friday, gaining 11% with Qualcom and Intel making some headway as the chip rally broadens out.

This is the fifth week in a row of gains for the Nasdaq and it’s very much looking like the double bottom in Oct/Dec was the low.

This article was written by Adam Button at www.forexlive.com.

The speculative market remains far too long euros but pared back the position in the latest week of CFTC data, in what might be a sign of what’s to come.

the EUR’s net speculative long positioning witnessed a significant decrease, dropping to 173,736 contracts compared to 187,089 in the previous week. As investors appeared to cut their bullish bets, the shift suggests some caution may be seeping into the market sentiment regarding the euro’s performance.

The Japanese yen experienced a considerable surge in short positions, hitting 80,660, marking a notable increase from the previous 64,791. This indicates a growing bearish outlook among traders on the yen. Similarly, AUD saw a decrease in its short positioning to 49,081, a slight relief from the preceding week’s 54,594.

In contrast, the British pound’s long position fell marginally from 12,593 to 11,589.

The Swiss Franc saw its small short position cut in half to 903 from the previous week’s 1,859, signalling a potential shift in traders‘ sentiment towards a less bearish outlook.

In net week’s data, I would expect to see more signs of US dollar buying as the dollar surged, inflation rose and the debt ceiling fiasco neared a conclusion. Given the size of the euro net position, it’s particularly vulnerable.

This article was written by Adam Button at www.forexlive.com.

Higher interest rates aren’t yet hitting the consumer hard or bringing inflation back to target, according to today’s April PCE report. Inflation rose 4.4% y/y in an acceleration from 4.2% previously while personal spending surged 0.8% in the month.

Bank of America has reaffirmed its base case expectation that the Federal Reserve will not implement a rate hike in June, though the bank maintains an inclination towards a hike in the future, noting that it’s a „close call“.

According to BofA, three conditions need to be met for a Fed rate hike: 1) strong economic data, 2) an increase in the debt ceiling, and 3) subdued regional bank stress.

The bank also believes that inflation remains too persistent for the Fed to commit to a prolonged pause in rate increases. Even if the Fed decides to forego a rate increase in June, BofA suggests that it will keep the possibility of a July hike on the table.

Separately, Goldman Sachs economists continue to chase their tails. After calling for a pause after the March bank stress and then seeing a hike anyway, they’re now teetering with their June call.

„While we continue to expect the Fed to pause deletion in June, this morning’s stronger-than-expected consumer spending and inflation data and the wide range of views by FOMC participants on the appropriate policy path make this a close call,“ Goldman Sachs economists wrote today.

The market is pricing in a 70% chance of a hike in June and a 100% chance of a hike in either June or July.

This article was written by Adam Button at www.forexlive.com.

Headlines:

• US futures nudge a little higher on the day
• Dollar continues to sit a little lower in quiet trading
• ECB’s Lane: Food inflation will reverse later this year
• ECB’s Lane: No sense of certainty on terminal rate
• ECB’s Vujčić: Inflation momentum is still persistent
• UK April retail sales +0.5% vs +0.3% m/m expected
• France May consumer confidence 83 vs 84 expected

Markets:

• GBP leads, USD lags on the day
• European equities a little higher; S&P 500 futures up 0.2%
• US 10-year yields down 2.6 bps to 3.788%
• Gold up 0.6% to $1,952.39
• WTI crude up 0.9% to $72.48
• Bitcoin down 0.1% to $26,450

It was a quiet session for the most part as there wasn’t any key headlines in Europe. In terms of data, we saw UK retail sales come in slightly better in April but after a softer revision to the March numbers.

But the story of the day is a retracement in dollar gains as the risk mood holds up ahead of the long weekend. US debt ceiling talks look to be making progress and that is helping to see US futures climb after a bit more of a cautious and tentative start.

The dollar tracked lower in European morning trade and continued that throughout the session, with the pound and antipodeans benefiting the most. GBP/USD is up 0.5% to 1.2380 while AUD/USD is up 0.5% to 0.6538 after a test of 0.6500 earlier in the day.

Elsewhere, USD/JPY is down slightly to 139.75 after a rejection at 140.00 with lower bond yields also placing a drag on the pair. EUR/USD is up just a touch by 0.2% to 1.0745 and USD/CAD down 0.2% to 1.3605 on the day.

It’s now over to US PCE price data to see what that has to offer, before markets start to gear towards the long weekend and then month-end trading next week.

This article was written by Justin Low at www.forexlive.com.

Well, the calls are coming in now after the UK inflation data this week. In case you missed it:

• Markets move to price in an additional rate hike by the BOE after UK CPI data

This article was written by Justin Low at www.forexlive.com.

• Biden expects Congress to raise the debt ceiling

Well, it’s not done until it is done but then again, this has been an issue that almost always runs down to the wire over the last few decades. I definitely thought there might be more drama for markets and a better potential opportunity to fade the panic, but we’ll see.

This article was written by Justin Low at www.forexlive.com.