Morning auction: Debt vote in sight, but more Fed pressure

Mike Dolan’s A Look at the Future in US and Global Markets

Out of the frying pan, and into the fire?

Relief from raising the U.S. debt ceiling this week is tempered by the uncomfortable prospect of even higher Federal Reserve interest rates — further evaporating hope for 2023.

As U.S. markets reopen after Monday’s holiday, investors are now likely to see both houses of Congress vote to raise the U.S. debt ceiling, after the White House and Republican leaders finally hammered out a deal before the Treasury runs out of money. June 5 is the last day.

While hard-line factions on both sides have expressed some concern over the details of the deal, the market assumes moderates will reach it by Friday. That’s followed by $1 trillion in new debt sales by the end of the year by the Treasury — which could create volatility in the bill market amid a realignment of money management strategies.

But with some U.S. inflation gauges proving stickier than many forecast and the May unemployment report due Friday, expectations are growing that the Fed will raise rates again next month — and that rates won’t be lower by the end of the year than they are now.

Futures markets now see a 60% chance of another quarter-point rate hike at the June 14 meeting to a range of 5.25-5.50%. Such a hike could be reversed by the end of the year, with an implied end-2023 Fed rate less than 10 basis points lower than it is now.

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While largely illiquid in U.S. hours, one-month Treasury bill yields were marked 10 basis points higher than Friday’s close.

U.S. 2- and 10-year Treasury yields fell about 5 bps on Tuesday compared to Friday’s close, as the debt deal further tightened monetary policy and fears of a rate cut and default. US sovereign debt default changes were also eased slightly.

The dollar spat between Bank of Japan and Finance Ministry officials has caused some late volatility there.

U.S. stock futures were about 0.5% higher, in part due to the easing of the debt covenant — unlike the last major debt ceiling impasse in 2011, which saw little significant disruption in stock indexes last month.

Tech and AI-fueled speculation is a big factor, with earnings from the likes of Nvidia and Marvell last week sending those two stocks up more than 20% each.

Elsewhere, stocks rose modestly in Asia and Europe. Weekend news of a snap election in Spain later this year was partially offset by encouraging inflation news early on Tuesday.

Spanish inflation fell to 3.2% year-on-year in May – down from 4.1% in April and below economists’ expectations of a fall to 3.5%.

Oil prices also fell, with the year-to-date decline in Brent crude now running at nearly 38%.

Turkey’s battered lira hit another record high on Tuesday – down more than 2% since the re-election of President Tayyip Erdogan in Sunday’s election, with his increasingly authoritarian rule and unorthodox economic policies undermining the currency.

Events to watch after Tuesday:

* US May Consumer Confidence, Dallas Fed May Manufacturing Survey, March Home Prices, Q1 Home Price Purchase Index

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* The House Rules Committee adopts a proposed debt ceiling bill, a necessary step before a full vote in the House of Representatives.

* Richmond Federal Reserve President Thomas Parkin speaks

* The US Treasury auctions 3-month and 6-month bills

* US corporate earnings: HP

Consumer confidence
Non-farm wages

By Mike Dolan, Editing by Susan Fenton [email protected]. Twitter: @reutersMikeD

Our Standards: Thomson Reuters Trust Principles.

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