Here comes debt ceiling pain and rising risks of a Fed skip

• FOMC Minutes: Officials split on whether more rate hikes are needed to fight inflation
• Republicans are holding the line of significant spending cuts
• T-bill yields surge to 7%

US stocks are declining after Wall Street got hit with a one-two punch of rising debt default risks and on fears that inflation might not allow the Fed to pause their tightening cycle. The FOMC minutes showed that officials are split on continuing with rate hikes and that they will remain data dependent.  Rate cuts are unlikely but it seems policymakers won’t be taking on any major stances until the debt limit is raised. If inflation ends up being stickier than economists are expecting the Fed could very well skip a June rate hike, but follow through with one at the July meeting.     

House Speaker McCarthy did not provide Wall Street any optimism that a deal is nearing. McCarthy said that there are a number of places we are still far apart on debt talks and that they still have differences over spending.  Everyone has seen this movie before and now we are finally starting to see some market stress as debt-ceiling talks remains at an impasse.  Short-dated Treasuries are in focus as the T-bill maturing on June 1st surges past 7.0%

Fed’s Waller, a voter, stated that fighting inflation remains a priority and that he does not support stopping rate hikes unless there is clear evidence inflation is moving down towards target. 

The May inflation data is probably going to show on a monthly basis that inflation is being stubborn here.  The headline might make more progress towards the 4% handle, but core will undoubtedly remain sticky in the 5s. 

RBNZ

It looks like mission accomplished for the Reserve Bank of New Zealand.  A final quarter-point rise brought the cumulative hikes to 525bps. With the key rate at 5.50%, still below inflation, the RBNZ is convinced inflation will come down and that weakening growth will actual put them in a position to cut rates by the end of the year. 

The New Zealand dollar got crushed today and the technical selling might not be over.

UK Core Prices Rise

Britain’s inflation problem is not getting any better.  Core prices are heading in the wrong direction, accelerating to 6.8%.  The weakness with headline has more to do with base effects than with the disinflation process.  Last year’s 50% rise with household energy bills was wiped away, but food inflation is not making any major progress.

The BOE’s job just got a lot easier as traders are now pricing in a much higher terminal rate, roughly a half-point higher than what they thought at the beginning of the week. 

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