US Stocks Surge as Debt Deal Cheers Investors

Stocks

Summary:

Positive sentiment driven by debt bill passage and monetary policy outlook

The US stock market experienced a notable upswing on Thursday, as investor optimism soared following the successful passage of the debt bill in the House of Representatives. The Dow Jones Industrial Average, a prominent blue-chip index, surged over 150 points, while the broader S&P 500 index gained nearly 1%, and the tech-heavy Nasdaq reached a new 40-week high, registering a robust 1.3% increase.

US Stocks Surge as Debt Deal Cheers Investors_1

The House's approval of the debt bill late Wednesday evening was met with enthusiasm from investors, who viewed it as a significant step toward averting a potential default crisis. This development brought a sense of relief and boosted market confidence, fostering a favorable environment for stock market growth.

Furthermore, market participants closely monitored the monetary policy outlook, which played a pivotal role in driving the positive sentiment. Recent data from the Institute for Supply Management (ISM) revealed that manufacturing activity contracted for the fifth consecutive month. Additionally, price pressures showed a notable easing, further reinforcing expectations that the Federal Reserve would likely pause its tightening cycle during this month. In response to these prospects, Treasury yields declined, while technology shares witnessed a significant boost, contributing to the overall market rally.

However, amidst the general optimism, Salesforce, a leading technology company, faced a setback as its stock declined by 5%. The decline was triggered by the company's report of higher capital expenses than initially anticipated. Despite this isolated occurrence, the overall market sentiment remained bullish, with investors focusing on the positive aspects of the debt deal and monetary policy expectations.

Adding to the positive developments, the market celebrated the passage of the Fiscal Responsibility Act of 2023 by a vote of 314-117 in the House of Representatives. This legislation, which aims to address fiscal concerns, is now making its way to the Senate and is anticipated to receive approval prior to the June 5th default deadline. Investors welcomed this news, as it provided further assurance of a stable economic environment, instilling confidence in the market's long-term outlook.

In summary, the US stock market experienced a significant rally driven by the successful passage of the debt bill and optimistic expectations regarding the Federal Reserve's monetary policy stance. The improved sentiment resulted in impressive gains across major indices, with the Dow Jones, S&P 500, and Nasdaq all exhibiting notable increases. While Salesforce faced a setback due to higher-than-expected capital expenses, the broader market remains buoyant as investors eagerly anticipate further positive developments in the coming weeks.

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Owen Li

Commodity

U.S. oil and gas production continued to rise strongly in March - the delayed impact of very high prices that prevailed until the third quarter of 2022.

Oil output increased by 171,000 barrels per day (b/d) in March compared with February, according to the U.S. Energy Information Administration ("Petroleum supply monthly", EIA, May 31).

The gains were led by the Lower 48 states (+137,000 b/d) and Gulf of Mexico (+45,000 b/d), which more than offset lower production from Alaska (-11,000 b/d).

Output rose by almost 10% in the first three months of 2023, compared with the same period a year earlier, and was the second-highest for the time of year after 2020.

On the gas side, dry production hit record 3,171 billion cubic feet in March and was more than 7% higher than in the same month a year earlier ("Natural gas monthly", EIA, May 31).

Gas output climbed to a record 9,180 billion cubic feet in the first quarter and was also 7% higher than a year before.

Shale production is often characterised as "short cycle" because wells have a relatively rapid decline rate and new ones must be drilled constantly to replace the dwindling output from older ones.

But there is still typically a delay of up to 12 months between a change in prices and a change in recorded production.

The pandemic saw a much faster pass-through from prices to production in 2020, but that was in response to an exceptional once-per-century crisis.

After adjusting for inflation, U.S. crude prices peaked at a monthly average of $119 per barrel in June 2022 (87th percentile for all months since 2000) providing a strong impetus to increase drilling and output.

Real gas prices peaked at a monthly average of $9 per million British thermal units in August 2022 (82nd percentile for all months since 2000) again giving strong impetus for more production.

Since then, prices have fallen to $72 per barrel (45th percentile) and $2.30 per million British thermal units (2nd percentile).

But the impact of these very high prices during the second and third quarters of 2022 was still filtering through into production growth in the first quarter of 2023.

The lagged impact of these earlier high prices should start to fade from the third quarter, and especially the fourth quarter.

The total number of rigs drilling for oil and gas was already down by around 7% in May 2023, compared with its peak in December 2022.

Slower drilling activity will eventually translate into slower production growth with a typical delay of up to 6 months.

In the meantime, however, high levels of production are keeping inventories elevated, especially in the case of gas, which is in turn keeping prices under pressure.

U.S. commercial crude inventories were still +24 million barrels (+5% or +0.43 standard deviations) above the prior 10-year seasonal average at the end of March. They have since normalised.

U.S. gas stocks were +214 billion cubic feet (+13% or +0.47 standard deviations) above the 10-year average at the end of March and were still +270 billion cubic feet (+13% or +0.63 standard deviations) above it in late May.

The contrast between fairly average crude inventories and a large surplus in gas explains why oil prices are close to the post-2000 average in real terms while gas prices are still trading near to their lowest point.

Source: Devdiscourse

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Warren Takunda

Traders' Opinions

In the week ending May 27th, the number of Americans filing for unemployment benefits increased by 2,000 from the previous week, reaching a total of 232,000. While this represents the highest level in a month, it fell below market expectations of 235,000. These figures, coupled with the downward trend observed since March, suggest that the labor market in the United States remains robust. This development strengthens the likelihood of the Federal Reserve implementing another interest rate hike in June, extending its tightening cycle.

Stable Labor Market Signals Persist

Despite the marginal increase in initial jobless claims, the overall labor market remains firm, as indicated by recent data. The four-week moving average, which smooths out week-to-week fluctuations, declined by 2,500 to 229,500. This downward trend signifies that the labor market has been resilient and capable of absorbing the impact of short-term fluctuations in unemployment claims.

Seasonal Adjustments and Regional Variations

When considering the seasonally unadjusted data, initial jobless claims rose by 5,296 to 207,941 during the reported week. Notably, Ohio experienced a significant increase of 2,133 claims, followed by New York with a rise of 1,277. Conversely, several states witnessed declines in unemployment claims, including North Carolina (-607), Arkansas (-576), Georgia (-394), and Florida (-356).

Potential Implications for Federal Reserve Policy

The better-than-expected jobless claims figures present an interesting scenario for the Federal Reserve. The persistently tight labor market, as reflected in recent data, may prompt the central bank to consider extending its tightening cycle by implementing another rate hike in June. This move would align with the Fed's objective of maintaining stable inflation and ensuring sustainable economic growth.

Market Reaction

In response to the news, financial markets are likely to closely monitor the Federal Reserve's upcoming decisions. A potential interest rate hike in June could impact various sectors, including equity markets, fixed income instruments, and currency exchange rates. Investors will scrutinize the central bank's statements for indications of future monetary policy direction and adjust their portfolios accordingly.

The increase in US initial jobless claims by 2,000 to 232,000, while below market expectations, suggests a resilient labor market. The consistently low levels of claims, in conjunction with the decline in the four-week moving average, signify the strength of the US economy. These factors reinforce the possibility of the Federal Reserve extending its tightening cycle through another rate hike in June. As the financial markets react to this news, market participants will closely watch for signals from the central bank regarding future monetary policy decisions.

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FastBull Featured

Daily News

[Quick Facts]

1. U.S. manufacturing activity contracted for the seventh consecutive month in May.

2. The U.S. House of Representatives has passed a debt ceiling bill.

3. Harker: Fed should stop raising rates, at least in June.

4. ADP makes rate hike expectations rise.

5. liquidity crisis may cause market concerns.

6. Bullard: prospects for continued disinflation are good, and continued vigilance is required.

[News Details]

U.S. manufacturing activity contracted for the seventh consecutive month in May

Data from the U.S. Institute for Supply Management (ISM) on Thursday showed that the manufacturing PMI fell to 46.9 in May from 47.1 in April. This is the seventh consecutive month that the index has been below the 50-year mark, indicating a contraction in manufacturing. It's the most durable contraction since the Great Recession. And new orders continued to slump amid rising interest rates, but the employment indicator rose to its highest level in nine months.

The continued weakness in PMI readings supports analysts' expectations that the economy will fall into recession this year. However, there have been several periods, including the mid-1990s and the mid- and late-1980s, when prolonged periods of PMI below 50 were not accompanied by a recession.

The U.S. House of Representatives has passed a debt ceiling bill

The U.S. Senate will consider a bill on Thursday to raise the ceiling for the government's $31.4 trillion debt, with just four days left to pass the bill and send it to Democratic President Joe Biden to sign into law, thus avoiding a catastrophic default.

The bill would temporarily remove the debt ceiling until Jan. 1, 2025. In exchange, the government will limit its spending.

Harker: Fed should stop raising rates, at least in June

Philadelphia Fed President Patrick T. Harker said in a speech yesterday that the Fed should not raise interest rates at its next meeting, despite the disappointingly slow decline in high inflation. He may change his mind if the monthly employment data released on Friday or inflation data released next week is much stronger than expected.

The economy is expected to grow less than 1% this year and the unemployment rate (currently at 3.4%) will rise to about 4.4%.

If unemployment rises faster than Harker currently predicts or inflation comes down faster, he could think the Fed will cut rates.

His baseline forecast is that interest rates remain unchanged, allowing time for inflation to fall. He favors maintaining what he currently sees as a "reasonably broad" path to avoid a possible recession if the Fed tightens policy too much.

The current interest rates are considered to be in restrictive territory and can stay there for some time. "We don't have to keep moving rates up, and then have to reverse course quickly."

ADP makes rate hike expectations rise

The ADP data released on Thursday showed that 278,000 new jobs were added, well above the expected 170,000. ADP also easily beat expectations last month (recording 296,000 jobs compared to 150,000 expected), which was also reflected in the strong payrolls data. Bias has been a powerful force in financial markets recently, so the market is likely to incorporate more upside risk into the upcoming non-farm payrolls data.

Following the release of the data, CME's FedWatch Tool showed that the probability that the Fed will leave rates unchanged in June is 66.8% and the probability of a 25 basis point rate hike is 33.2%.

liquidity crisis may cause market concerns

The U.S. government hit the debt ceiling of $ 31.4 trillion in January this year. The Treasury Department then took "unconventional measures" to avoid a debt default. By May 30, the amount available in the general account of the U.S. Treasury has been reduced to less than $40 billion.

Once the bill on the federal government debt ceiling and budget is signed into law, the debt ceiling impasse is temporarily eased. The U.S. Treasury will act quickly to fill this account, meaning the Treasury will put a lot of short-term Treasury bonds into the market, which will draw a lot of liquidity from the market.

As it stands now, the new Treasuries issued could reach about $1.4 trillion. If the U.S. government in the short term issues large-scale bonds and implement the current high-interest rates, it may attract a lot of money originally to be invested in other subjects or stored in banks. This will not only exacerbate the recent widespread deposit outflow from the banking sector, so that banks will face greater liquidity pressure but also may push up short-term loans and bond rates, raising funding costs for companies already under pressure in a high-interest rate environment.

Bullard: prospects for continued disinflation are good, and continued vigilance is required

In an article released Thursday titled "Is Monetary Policy Sufficiently Restrictive," St. Louis Fed President James Bullard pointed out that in terms of current macroeconomic conditions, interest rates are at the low end of a sufficiently restrictive range level. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.

At the same time, he noted that where within the sufficiently restrictive zone should the policy rate be? And are there other factors to consider (e.g., financial stability)? Such assessments could be reflected in judgments by the FOMC going forward.

[Focus of the Day]

UTC+8 20:30 U.S. Non-Farm Payrolls (May)

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Alex

Economic

Markets think the Fed will "skip" June hike, but strong jobs could change that

When Federal Reserve Chair Jerome Powell opened the door to a potential Fed pause after the May FOMC meeting, financial markets swiftly priced a Fed peak with potentially 100bp of rate cuts by January 2024. However, strong jobs, sticky inflation and a raft of hawkish comments from some prominent regional Fed officials saw this completely reversed. As of last Friday a June hike has been seen as more likely than not, with perhaps just a couple of cuts priced by next January. This week though, comments from Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker reignited the prospect of skipping a hike in June and a reassessment in July. There is clearly a core group at the Fed who think 500bp of rate hikes and tighter lending conditions may mean they have done enough.

We outlined our U.S. rates view and the risks surrounding it in this report. It is that the Fed has peaked and we will get rate cuts from the fourth quarter onwards but we must acknowledge that if we get a strong jobs report and U.S. CPI comes in hot on 13 June, the day ahead of the 14 June FOMC meeting, that could be enough to tip the balance in favour of another hike.

Some data points to strong gains

At the moment, the consensus is for the economy to add 195,000 jobs in tomorrow's report, which is lower than the 253,000 outcome for April. In fact, none of the 69 organisations surveyed by Bloomberg expect payrolls to come in stronger than last month, which is a little surprising. In terms of the numbers we have seen, we know that job openings remain incredibly high and are in fact larger than the total number of Americans that regard themselves as unemployed. This means that a lack of people with the required skill sets continues to restrict hiring.

Yet today's ADP jobs release reported private payrolls rose 278k versus the 170k consensus - it is a bit of a black box model that doesn't have a great track record in predicting actual payrolls. Then we have the homebase data on hourly employed workers which was OK and the ISM manufacturing employment which pointed to modest growth. Then there are comments from St. Louis Fed economist Max Dvorkin, reported by MNI as saying that their real-time labour market index points to household employment (not the same as payrolls) rising 638k!

But other data is more cautious

Nonetheless, we continue to see the number of job lay-off announcements climb. Indeed, today's Challenger job lay-offs report for May showed 80,089 total for lay-offs, up 13,094 on April's level, giving a 286.7% year-on-year change. Hiring announcements totalled just 7,885 versus 23,310 in April. This is the lowest hiring figure since November 2021 and before then, you have to go back to February 2016 to find a lower number than reported today. Yesterday, we had the Federal Reserve's Beige Book which suggested that "Employment increased in most Districts, though at a slower pace than in previous reports".

Watch for slowing wage growth despite record low unemployment

Putting it all together, we have some very contradictory signals, meaning we have little confidence in our own 200k forecasts and an acknowledgement that pretty much anything could happen. That said, the payrolls number isn't the only figure to watch. Unemployment fell to 3.4% last month, however, it is wages that will probably get more attention given the Fed's wariness that tight labour markets could keep service sector inflation higher for longer. Last month, it rose 0.5% month-on-month, but the market expects this to slow back to 0.3%.

Nela Richardson, chief economist at ADP, commented within their report that they saw the second month where there has been a "full percentage point decline in pay growth for job changers," before adding that "pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring."

Inflation could be the clincher

In terms of consensus expectations, the market is looking for 195k jobs with unemployment ticking up to 3.5% from 3.4% and average hourly earnings rising 0.3% MoM. If we get something similar to that we are likely to see the market remaining of the view that the Fed will not change policy at the June FOMC meeting, but leave the door open for a possible July rate hike.

However, if we get a 250k+ figure on jobs and wages rise 0.4% MoM or above and unemployment stays at 3.4%, we suspect it is likely to move in the direction of a 50:50 call for a hike. That would leave the outcome determined by the May CPI report, due out the day ahead of the Fed meeting. A 0.4% MoM core CPI print would put the decision on a knife edge and could give enough ammunition to push another hike over the line.

Source: ING

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

In a significant development for the US housing market, the average rate on a 30-year fixed mortgage has reached its highest level in six months. According to a survey conducted by mortgage giant Freddie Mac, the rate rose to 6.79% in the week ending May 31st, 2023, up from 6.57% in the previous week. This surge is in line with the Federal Reserve's aggressive tightening measures, leading to growing market expectations of another rate hike. As a result, industry experts anticipate a potential weakening in purchase demand as rates approach the seven percent threshold. US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

US 30-Year Mortgage Rate Climbs to 6-Month High, Reflecting Market Expectations of Federal Reserve Tightening_1

Rising Mortgage Rates and Economic Outlook

The recent spike in mortgage rates can be attributed to the buoyant state of the US economy. A thriving economy has instilled confidence in the market, leading to an adjustment in the pricing of mortgage rates. Sam Khater, Chief Economist at Freddie Mac, noted that the rise in rates comes as the market prices in the likelihood of another Federal Reserve rate hike. The current rate of 6.79% is significantly higher than the fixed rate of 5.09% during the same period last year.

Impact on Housing Market

The increasing mortgage rates are expected to have implications for the US housing market. Over the past months, there has been a steady flow of purchase demand, primarily driven by attractive rates in the low to mid six percent range. However, with rates inching closer to the seven percent mark, experts anticipate a potential weakening in this demand. Higher mortgage rates generally lead to increased borrowing costs, making homes less affordable for prospective buyers. As a result, this development could potentially slow down the pace of home purchases and impact the overall growth of the housing market.

Effects on Real Estate Investments

Rising mortgage rates also have implications for real estate investors. Higher borrowing costs can reduce the affordability of investment properties and potentially affect the returns on such investments. Investors who heavily rely on financing to acquire properties may face challenges in finding favorable terms and interest rates. Moreover, the rising mortgage rates could also impact the demand for rental properties, as potential tenants may reconsider their housing choices in light of increased costs.

Federal Reserve Policy and Future Outlook

The Federal Reserve's aggressive tightening measures have played a significant role in the recent surge in mortgage rates. The central bank's actions are aimed at addressing inflationary concerns and maintaining economic stability. However, the impact of these actions on the housing market is a delicate balancing act. While higher rates can help curb inflation, they also have the potential to dampen economic activity, especially in sectors like housing. Therefore, it will be crucial to closely monitor the Federal Reserve's future policy decisions and their implications for mortgage rates and the overall housing market.

The US 30-year mortgage rate has reached a six-month high, reflecting market expectations of another Federal Reserve rate hike. This increase comes amidst a buoyant economy and the need to address inflationary pressures. However, the rising mortgage rates may weaken purchase demand as affordability becomes a concern for prospective buyers. Additionally, real estate investors may face challenges due to higher borrowing costs. It remains essential to monitor future Federal Reserve policy decisions to better understand their impact on mortgage rates and the broader housing market.

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Damon

Economic

Asian markets are looking for a positive end to the week on Friday following a solid rally on Wall Street the day before, as the U.S. debt ceiling vote passed its first congressional hurdle and hopes rose that the U.S. economy will achieve a 'soft landing'.

South Korean inflation for May is the main regional economic indicator on the calendar, and the won could also get a jolt from revised first quarter GDP growth figures. Otherwise, Friday's impetus looks set to come from Thursday's 'Goldilocks' trading on U.S. markets.

A batch of indicators suggested U.S. inflationary pressures are cooling, which could allow the Fed to pause its rate-hiking cycle later this month, while other data showed the labor market remains strong.

A win-win for risky assets.

A weaker dollar and lower Treasury yields also helped fuel the surge in U.S. stocks, with the Nasdaq and tech sector once again the highest fliers. The Nasdaq is on track for a sixth straight weekly gain, which would be its best run since 2019.

Contrast that with China, where purchasing managers index reports for May were mixed, broader economic data is weak, the central bank is expected to ease policy soon, and investors are pulling their money out of the country.

Little wonder the yuan is sliding further below 7.00 per dollar to fresh 2023 lows on a near daily basis.

The dollar's strength against the yuan on Thursday is telling, because it was not replicated across Asia. The Indian rupee registered its biggest rise in three months after PMI data showed factory activity in India grew last month at the fastest pace in two and a half years.

This follows Wednesday's surprisingly strong GDP data.

The Australian dollar had its best day in six weeks, and the Japanese yen rose for a fourth consecutive session - its longest winning streak since November.

Global markets on Friday will take their cue from the U.S. employment report for May but its release comes after Asian markets close, leaving Korean CPI and revised GDP as potentially the main market-moving economic indicators.

Annual inflation is expected to ease to 3.30% from 3.70% in April, which would be the lowest since October 2021.

Here are three key developments that could provide more direction to markets on Friday:

- South Korea CPI inflation (May)

- South Korea GDP (Q1, revised)

- Japan monetary base (May)