Limited debt ceiling progress, limited reaction

USD: Debt ceiling talks see no progress

The dollar remains broadly unchanged in the FX markets with no obvious macro news to drive the markets ahead of the key US inflation data this afternoon. The much-anticipated talks at the White House between President Biden and Congressional leaders ended with no cause for optimism. Kevin McCarthy saw “no movement” from the White House although President Biden described the talks as “productive”. The potential positive from the meeting was the agreement that budget discussions would take place with Congressional aides and presidential staff to hold discussions before another meeting between Biden and Congressional leaders on Friday.

The deadline x-date estimate from the US Treasury of “early June or even 1^st June” was given credibility yesterday when the Bipartisan Policy Center released its own estimate of the deadline and endorsed the US Treasury estimate of early June explaining that states hit by recent natural disasters like Alabama and Georgia were given extra time to fill tax returns and hence those delays have brought closer the estimated x-date. Once at that point the US government would be playing “daily Russian Roulette”. Kevin McCarthy has dismissed the idea of a short-term extension to the debt ceiling but given how fundamentally different the two sides are on how to resolve this, we see a short-term solution as the most plausible at this stage. A suspension of the debt ceiling until 30^th September would allow discussions to take place over the debt ceiling and the budget simultaneously (but separately) and a budget agreement for next year could at least be viewed in the context of what is going to be required for longer-term fiscal policy to stabilise debt in GDP terms.

What remains clear and in need of addressing is that under current legislation, debt-to-GDP is trending higher and is therefore unsustainable. The Committee for Responsible Federal Budget estimates that under Biden’s medium-term proposals to reduce debt over the next decade by USD 3trn, the debt-to-GDP ratio rises from 98% to 110%. Under the Republican plan to reduce debt by USD 4.8trn, debt-to-GDP rises to 106%. The problems are vast even beyond the resolution of the debt-ceiling stand-off and reinforce our longer-term US dollar view that the dollar last year reached a long-term high and has now begun a period of depreciation.

USD LONG-TERM TREND MAY HAVE TURNED AFTER LONGEST BULL-RUN

Source: Bloomberg, Macrobond & MUFG GMR

USD: CPI in focus as US data provides support

The flow of data of late has turned a little more favourable for the US dollar and has certainly hindered EUR/USD from making more sustained advances above the 1.1000-level. Weak factory orders and industrial production data from Germany in recent days was in contrast to the stronger than expected jobs report on Friday. The gain for the dollar has been relatively modest with the US data not seen as enough to shift the dial on the expectations of a pause by the FOMC. Similarly, the weak data has done nothing to shift the expectations of further ECB rate hikes which has been backed up by ECB official’s rhetoric confirming plans for more rate hikes.

But today brings the top of the top-tier data from the US – the CPI data and if there is one piece of data that could shift market thinking it is the CPI report. The NFIB data yesterday showed that the “Higher Selling Prices” index fell to 33.0, the lowest level since March 2021 when headline CPI YoY was at 2.6%. The data is a good indication that overall price pressures continue to ease. But the CPI data today will also capture an increase in energy prices with the headline MoM picking up from 0.1% in March to possibly 0.4%. Retail gasoline prices increased reflecting crude oil price increases although that gain is reversing as we move further into May.

A big element that is a little more difficult to predict is the pace of MoM change in rents. The rent of primary residence and OER have both slowed to 0.5% MoM, the slowest rates since March/April 2022 and if that rate is matched for primary rents, the annual rate will decelerate and would be a key potential turning point.

An upside surprise today may still not shift the dial too much. The next CPI report for May will be released on 13th June, the day before the June FOMC meeting. Certainly, if there are upside surprises in more volatile components today, the reaction may be more muted than in previous CPI overshoots. Nonetheless, there must be a risk of a further liquidation of stale EUR/USD long positions. The upward momentum has faded and the compelling ECB/Fed divergence trade is well priced and not as compelling following recent data flow. Risks in that regard feel more to the downside. So with the momentum favouring the US dollar at the moment an upside surprise will add further impetus for the dollar over the short-term. That said, with another CPI print before the FOMC meeting in June it would probably take a large 0.2ppt upside surprise or more to see a rates and FX move that is sustained and meaningful in size.

US PRIMARY RENTS AND OER M/M GAINS HAVE SLOWED – CAN IT CONTINUE?

Source: Macrobond

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian Industrial Production (YoY)	Mar	-1.7%	-2.3%	!
IT	09:00	Italian Industrial Production (MoM)	Mar	0.3%	-0.2%	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-1.2%	!
US	13:30	Core CPI (YoY)	Apr	5.5%	5.6%	!!!!
US	13:30	Core CPI (MoM)	Apr	0.4%	0.4%	!!!!!
US	13:30	CPI (MoM)	Apr	0.4%	0.1%	!!!!!
US	13:30	CPI (YoY)	Apr	5.0%	5.0%	!!!!
US	13:30	Real Earnings (MoM)	Apr	0.0%	-0.1%	!
CA	13:30	Building Permits (MoM)	Mar	-2.9%	8.6%	!!
US	16:00	Cleveland CPI (MoM)	Apr	0.6%	0.4%	!!
SZ	17:00	SNB Chairman Thomas Jordan speaks	--	--	--	!!!
US	18:00	10-Year Note Auction	--	--	3.455%	!!!
US	19:00	Federal Budget Balance	Apr	235.0B	-378.0B	!

Source: Bloomberg