Debt-Limit talks advance and there goes the cooling inflation narrative

• Dollar approaches 2-month high; 2-year yield rises 8.1 bps to 4.616%, the 11th straight day of gains, longest streak since September
• Fed’s Mester noted that the previous rate hikes will effect the econonmy
• Inflation is looking stickier than ever as the PCE supercore surges

US stocks are rallying as Washington DC nears a debt deal ahead of the long weekend. ​ The risks that a debt deal could fall apart at the 11^th hour remains, which makes Treasury Secretary Yellen’s update over the X-date critical.

Wall Street seems to be shrugging off some hawkish data that is making the June meeting a live one for the Fed. Once a debt deal is done, markets will have to deal with the harsh reality that the Fed is going to kill this economy. ​ The end of tightening might not occur until the end of summer and that means we will probably get bigger rate cuts next year. ​ ​ ​ ​

Debt

The Treasury cash balance is evaporating quickly, tumbling below $50 billion as lawmakers continue to inch toward a debt deal. ​ Optimism remains that the US won’t default on its debt as this deal appears to be giving out wins to both the GOP and progressives. Speaker McCarthy noted that there is no agreement, but that negotiators will continue to work through this weekend

The debt limit increase is expected to last 2 years, defense spending is expected to rise, renewable energy will get funding, but there are still some red lines, such as work requirements for entitlements. ​ This will be a long weekend for negotiations, but time is running out as once a deal is outlined, 72 hours is required for lawmakers to review the text. ​

US Data

A slew of hot economic data points are keeping the bond market selloff going strong. ​ The US economy is too resilient and this will force the Fed to not only deliver more tightening but to keep rates higher for much longer. ​ Fed rate cut bets will soon get pushed into next year as the economy remains somewhat hot, excluding the manufacturing sector.

The Fed’s preferred measure of inflation, the so-called core PCE, (personal consumption expenditures deflator) rose 0.4% for the month of April and on an annual basis climbed up to 4.7%, 0.1 ppts higher than forecast. Core service prices -ex rent posted the biggest rise in three months, which supports the argument that the service sector is not weakening.

Higher prices did not deter spending as that climbed more than expected to 0.8% in April. Incomes ticked higher as expected to 0.4%, which suggests the consumer is still going to spend in the future.

USDJPY

The dollar keeps on rallying as the 2-year Treasury yield rose for the the 11th straight day.  A potential Gartley pattern could identify point D around the 142.50 to 143.00 region.

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