Global Stocks Rise on US Jobs and Debt Ceiling Agreement, Central Banks in Australia and Canada to Meet
Last Week Review
Global equities rose 1.6% last week, aided by late-week U.S. gains with the resolution of the debt ceiling impasse and ongoing labor market resilience. While equities were flat for May, this masked major differences at the sector level where technology-related industries rose 5% to 10% while most other sectors fell by 4% to 6%. This occurred as interest rates rose, typically a drag for technology companies, as optimism around artificial intelligence supported tech stocks.
U.S. Extends Debt Ceiling, Sidestepping Potential Default
The bill to extend the debt ceiling faced some opposition from Congress during the week, but it passed relatively smoothly with a surprisingly comfortable vote in the House of Representatives. The bill, largely a compromise between demands from Democrats and Republicans, extends the debt ceiling past the 2024 presidential elections. It includes six years’ worth of spending caps — concentrated in non-defense discretionary spending — of which we believe only two years are enforceable. While the bill reduces spending by a decent amount, preliminary estimates suggest only modest headwinds to U.S. economic growth.
Financial Markets Price Out U.S. Default Risk
Throughout the debt ceiling talks, equities indicated little concern from investors on longer term fallout. However, the Treasury market had some volatility. In response to last week’s debt ceiling progress, Treasury yields in June maturities decreased and the cost of default insurance fell as well.
Mixed Signals from May Jobs Report
The U.S. added 339,000 jobs in May, according to the jobs report released Friday, nearly 150,000 above estimates. However, the unemployment rate moved up more than expected to 3.7% from 3.4% in April and wage growth ticked down to 4.3% year-over-year. We believe the report and other recent data are unlikely to steer the Federal Reserve towards a June rate hike. The bar for that remains high given comments from Fed leaders last week that largely pointed to a preference to stand pat. But lingering economic strength will keep open the possibility of further Fed tightening. Investors see about an 80% chance of another rate hike by the July meeting, based on futures trading.
European Inflation Declines More Than Expected
Flash estimates for the euro area Consumer Price Index dropped in May to 6.1% year-over-year from 7.0% in April. Core inflation, which excludes more volatile energy and food prices, fell to 5.3% from 5.6%. Despite falling below expectations, inflation in Europe likely remains elevated enough to keep pressure on the European Central Bank to increase rates. Futures markets show investors believe the rate will increase another 0.5% through September.
This Week Preview
Investors Look Beyond the Debt Ceiling
With the debt ceiling in the rearview mirror, we think investors will look for any follow-on implications from the impasse. That may include increased Treasury issuance by the U.S. to refill its coffers and any communication from rating agencies on the outlook for the U.S. government’s credit rating.
Global Economy: Reports on U.S. Factory Orders and China’s Inflation
The U.S. ISM Services Purchasing Manager’s Index is set for release on Monday, with expectations of a modest increase. In addition, U.S. factory and durable goods orders reports are scheduled for Monday. China is set to report on imports and exports along with inflation (Consumer Price Index and Producer Price Index). Imports and exports are expected to fall on a year-over-year basis while consumer inflation is expected to remain reasonably close to the prior month’s level.
Central Bank Meetings in Australia and Canada
The Reserve Bank of Australia will meet on Tuesday and the Bank of Canada will meet on Wednesday. Market expectations point to both central banks likely standing pat with their current policy rates of 3.85% for Australia and 4.5% for Canada.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of June 5, 2023.
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