Debt ceiling
For most of the week there was growing optimism that US leaders were getting closer to reaching a deal on the US debt ceiling. Before Friday, comments from Republican Speaker McCarthy, who said “I can see now where a deal can come together”, and that the negotiators were in a “much better place”. Furthermore, he even said he expected the House to consider a deal next week, with an “agreement in principle” possible during the weekend. However, on Friday, debt limit talks hit a wall as the GOP negotiators walked out on negotiations. The latest is that President Biden and House Speaker Kevin McCarthy will meet at the White House today to resume negotiations. There was a slightly more positive tone from both sides after a phone call between the two yesterday Sunday. Yellen said over the weekend that the chances that the US can pay its bills by mid-June are "quite low".
Fed speakers
Several Fed speakers pushed back on the idea that the Fed were about to reverse rates anytime soon. Atlanta Fed Bostic said that “we won’t really be thinking about cutting until well into 2024”, which is at odds with market pricing that’s expecting 94bps of cuts by the time of the January 2024 meeting. Minneapolis Fed Kashkari said that “We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down”. One dovish exception came from Chicago Fed Goolsbee, who mentioned that there was “still a lot of the impact of the 500 basis points we did in the last year that’s still to come”, so explicitly warning of policy lags. Cleveland Fed Mester said that rates weren’t sufficiently restrictive just yet, and that “given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probably that the next move could be an increase or a decrease”. Richmond Fed Barkin said that “if more increases are what’s necessary” to reduce inflation then he was “comfortable doing that.” Dallas Fed Logan said that “we haven’t yet made the progress we need to make” on inflation, and that “we aren’t there yet” in terms of it being appropriate to pause rate hikes. An FT interview with St Louis Fed Bullard came out, who said that the situation “may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control”. On the more dovish side, Governor Jefferson said that “a year is not a long enough period for demand to feel the full effect of higher rates.
Inflation expectations
US retail sales increased in April by +0.4% (vs. +0.7% expected), suggesting consumer spending is holding up. However, it contrasts with results from several consumer companies. Foot Locker, whose shares plunged 27% after the company said lower tax refunds and higher prices for gas, food and rents are hurting its customers' ability to spend on discretionary goods. Home Depot, which fell 2% on Tuesday after comparable sales missed estimates and guidance came in light. Target said its sales barely grew y-o-y, while a soft forecast was issued due to inventory impacts and retail theft. The macro data may be just as important as individual earnings. US April retail sales recorded their first upswing since January, but the 0.4% monthly expansion was still below the expected figure of 0.7%. In terms of y-o-y numbers, things have been steadily declining since last July, with the latest print coming in at 1.6% (and below the 4.9% inflation rate for the same period). Consumers have also continued to shift away from goods spending like furniture, home appliances and electronics (which was the most sought goods for during the pandemic) into services spending such as restaurants, health and personal care.
Global central banks
In Canada, CPI reading unexpectedly rose in April. It showed inflation rising to +4.4% (vs. +4.1% expected), which ended a run of 5 consecutive monthly declines in headline inflation. In turn, investors dialed up the chances that the Bank of Canada might hike rates at the next meeting following their recent pause, with overnight index swaps now seeing a 35% chance of another 25bps move in June. In Australia, the minutes from the Reserve Bank of Australia indicated that still sees further rate hikes “may be required”, depending upon how the nation’s economy and inflation evolve. Finally, the People's Bank of China (PBOC) offered to keep the rate on 125bn yuan ($18bn) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.75% for a ninth month. The central bank’s operation added 25bn yuan more than the amount maturing in May, to keep the economic recovery on track as credit growth slumped.
