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Debt Ceiling Deal Reached

Latest: on Saturday evening, Biden and McCarthy agreed, in principle, to unlock the debt ceiling standoff. The agreement will increase the $31.4tn debt ceiling for two years and include limits on government spending until late 2024. The legislation still needs to be approved by both chambers of Congress next week to pass it into law.

“The agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing,” President Biden said.

“I believe this is an agreement in principle that is worthy of the American people,” Republican House Speaker McCarthy said.

“It has historic reductions in spending, consequential reforms that will lift people out of poverty into the workforce, rein in government overreach,” he added.

Friday had already been a positive day in markets following remarks that suggested a deal was on the way. Kevin McCarthy told reporters that his White House counterparts were being “very professional, very knowledgeable.”

The main drivers of last week’s highly volatile trading sessions, besides the default risk, were a rise in US PCE inflation as well as a surprise increase in UK’s core CPI inflation, and the fact that Germany officially fell into recession. The consequences were a stronger dollar and higher interest rates in particular those in UK markets. Weak manufacturing data also weighed on sentiment and most commodity markets sold off. In equity markets, a strong rally in semiconductors stocks helped Nasdaq indexes outperform their value counterparts with a ~3% jump.

Turkey holds the presidential runoff election today with an advantage for Erdoğan after Sinan Ogan (5% of votes) endorsed the incumbent president. 

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There were three monetary policy meetings last week, New Zealand, Korea and Israel.

The RBNZ lifted its OCR rate by 25bp to 5.5%, the highest since Oct 2008. The central bank said that the rate will need to remain at a restrictive level for the foreseeable future to bring inflation down to its 1-3% target range. The latest inflation reading was 6.7% YoY, marginally lower than the 7.3% peak in Q2’22.

“Global economic growth remains weak and inflation pressures are easing,” the RBNZ stated.

The Bank of Korea left rates unch at 3.5% but warned it may not be done with tightening. The BoK cut its growth estimate for ’23 to 1.4% while maintaining its inflation projection at 3.5%. Korean inflation stands at 3.7%, down from a 6.3% peak in mid-2022. 

Germany in Recession

The German economy fell into recession in Q1’23 after contracting 0.3% QoQ, the second consecutive quarter of declines. The Finance Minister described the update as a ‘surprisingly negative signal’. The catalyst for a weaker economy was the significant jump in energy prices last year due to the war. May’s manufacturing PMI showed a steep slowdown in activity (42.9 points). The Bundesbank expects the economy to grow modestly in Q2. 

US inflation remains high

Personal Consumption Expenditures (PCE) inflation rose by 0.4% MoM and 4.4% YoY in April while core PCE printed at 0.4% and 4.7%, with both measures accelerating. The core PCE indicator is the Fed’s preferred inflation gauge. This points to a pause in the downward trend of inflation from the peak in mid-2022.

The consumer spending reading in April was strong at 0.8% MoM and beat estimates. The GDP Deflator for Q1’23, another inflation measure, was 4.1%, above estimates and higher than in Q4’22.

The probability of a 25bp rate hike by the Fed at the June 14 meeting rose to 64%, as implied by futures contracts. However, markets continue to price in a rate cut by year-end. 

UK Inflation Hot

Headline CPI in Britain decelerated to 8.7% in April from 10.1% a month earlier but the core CPI measure accelerated to 6.8%, a 31-year high, surprising the central bank. The RPI indicator also eased to 11.4%. Food prices remain close to a 45-year high.

The BoE meets on June 22 and futures point to a 95% chance of a 25bp rate hike from the actual base rate of 4.5%.

$ Interest Rates

The higher inflation print in the US increased the chances for another rate hike, pushed the $ to a two-month high, and the DXY index closed at 104.2 points. The biggest losers were the NZ and Aussie dollars and the ¥, which remains the weakest major currency this year.

In interest rate markets the notable mover was Gilts as British bonds fell sharply on persistently high core inflation, which surprised the Bank of England. The outlook for rates changed suddenly as the central bank may have to lift rates more than anticipated. The yield on one-month bonds added 47bp last week to 4.87%, the highest level in 15 years.


The broad Bloomberg BCOM index accumulated six weeks of declines despite crude oil edging >1.5% higher last week. Natural Gas prices plunged on both sides of the Atlantic, base and precious metals fell, grains recovered some of their recent losses and all soft agricultural contracts ended lower. The catalyst for the weakness includes the latest data on the Chinese economy, a stronger dollar and prospects for higher interest rates.

US Natural Gas futures plunged >15% WTD reversing the jump of the previous week to close at $2.18/MMBtu for front-month contracts. Prices fell despite the decline in wind power generation which led to an increase in the demand for gas. The drivers of last week’s move include rising exports from Canada, forecasts for milder US weather and lower expected demand due to the US Memorial Day holiday tomorrow.

The European Gas benchmark, the Dutch TTF contract, dropped to a two-year low and ended 19% lower at €24.5, accumulating a 68% YTD bear market. The mix of above-average temperatures and efficient use the gas storage drove demand down.

Corn futures reached a one-month high on dry weather conditions in the US Midwest region that increases concerns about this year’s crop. On Tuesday, the USDA will issue a weekly report on the progress of grain planting. July Corn rallied 9% WTD to USd604.

Brazil’s coffee exports could surprise on the upside in H2’23 according to the head of the export group Cecafe, following a decline of 20% in shipments in the first four months of the year. Prices dropped >5% last week.

Copper prices fell for a sixth straight week and closed at $8,135/metric ton. Inventories at LME warehouses have nearly doubled in the past four weeks. Dynamics in the copper market are being driven by a global industrial slowdown with manufacturing PMIs falling sharply last week. China is the world’s largest consumer of copper and the latest economic data points to a deceleration.