Market Pulse - The week in review - June 6th 2023

Duncan Presant - Jun 06, 2023
US lawmakers reached an agreement on the "Fiscal Responsibility Act," which extends the debt limit until 2025 and introduces caps on discretionary spending for the next two years.



▪ US lawmakers reached an agreement on the "Fiscal Responsibility Act," which extends the debt limit until 2025 and introduces caps on discretionary spending for the next two years. The agreement was approved by both the House and the Senate, bringing an end to any potential default fears.


▪ The US Treasury needs to replenish their short-term liquidity account, likely to the tune of $500 billion to 1 trillion this year, funded through short-term bill issuance. The primary source of proceeds is expected to come from funds currently being deposited in the Fed’s Reverse Repo Program (RRP). This outcome would see investor funds moving from one government account to another, which would have little effect on overall liquidity. However, there is a risk that commercial bank deposits could be moved into T-bills (with a higher yield and the US debt default tail risk now removed), which could exacerbate the funding situation for the banking system. While this large issuance could be a negative liquidity event for the financial system, our base case expectation is for a carefully managed process by the Fed on behalf of Treasury, with limited impact on broad liquidity.


▪ US employment numbers released on Friday morning have once again pictured a resilient job market (although it came with an uptick in the unemployment rate, which comes off extremely low levels). Markets and policymakers will likely be encouraged by the report, who besides strong job creation, showed a reduction in wage pressures. Overall, on the week, the resolution of the debt ceiling debate, relatively dovish comments from Fed officials and this strong job report have led to lower Treasury yields and stronger equity markets.


▪ Recent indicators of Chinese economic activity point towards a continued deceleration. Despite the optimistic expectations surrounding China's reopening trade at the beginning of this year, the data over the past couple of months have been underwhelming. Notably, Chinese manufacturing activity, which remained relatively stable during the lockdowns, is weakening. Similarly, the services sector, which had been a prominent beneficiary of the global economic reopening, is also experiencing a loss of momentum. In response to this slowdown, the Chinese government is likely to implement measures aimed at stimulating the economy and ensuring that the targeted +5% growth for 2023 is achieved.


▪ Canadian GDP grew by 0.8% in the first quarter, primarily fueled by a surge in exports and an uptick in household spending. However, declines in housing and business investment, coupled with a reduction in inventories, indicate potential challenges ahead. Particularly concerning are weaker corporate profits and the escalating costs of servicing debt, which could pose headwinds to sustained economic growth.


▪ The European inflation picture continues to improve, welcomed news for the European Central Bank. Food and energy prices continue to drive the monthly trend lower. The ECB will likely continue raising interest rates with a focus on core inflation, which is trending in the right direction, but remains well above target. They are faced with a difficult balancing act of delivering price stability while avoiding a more significant economic contraction. This could force them to stop interest rate hikes sooner than previously thought.





▪ On Wednesday, the Bank of Canada will deliver a decision on interest rates. The small increase in CPI last month, coupled with a healthy GDP print for Q1 have stirred up calls for a 25bps hike. While the Bank has left the door open to further hikes, policymakers have also signalled a strong willingness to be patient as past rate increases work their way through the economy, with an expectation that inflation will drop towards 3% in coming months. We expect them to keep rates unchanged.


▪ On Monday night, the Reserve Bank of Australia (RBA) is anticipated to maintain its target interest rate at 3.85%. On Friday, Canadian employment data for May will be released, providing insights into the country's labour market. Additionally, trade balance reports for several major countries are due to be published, shedding light on international trade activity.


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