Expect for Tuesday to be dominated by attention directed on Washington with the Whitehouse set to meet with Congress after warnings from former Fed Chair and current United States Treasury Secretary Janet Yellen that the debt ceiling needs to be raised to avoid economic calamity.
Yellen has made it clear that the United States will not be able to pay its bills by June 1 if Congress does not raise or suspend the debt ceiling. Yet, we should also be aware that debt ceiling headlines have become something of a seasonal topic for news attention and the warnings are more aimed at easing political gridlock in Washington rather than an impending crisis. The debt ceiling has been raised, extended, or revised 78 times since 1960. It has become more of an increased theme in recent times, mostly because political news started to dominate market headlines in the age or populism but the most likely outcome to the latest round of talks will be that Congress kicks the can down the road by delaying the risk of default until next year.
All in all, traders should not allow debt ceiling headlines to disguise what is really driving financial market sentiment. Banking stresses will continue to linger in the background, but the main event for the week in terms of economic data releases will be Wednesday’s inflation report from the United States.
Even if the US inflation reading on Wednesday shows that price pressures are cooling and that the Fed is doing its job, financial markets could still turn lower. This is because the Fed might actually look at the reading as validation that higher US interest rates are helping certain aspects of risks to United States economic momentum (long-term inflation) and that keeping rates higher for longer might need to become somewhat of a new normal in order to truly beat inflation away far into the future.
Meanwhile what traders really want to know from the Fed but are learning that they are not going to get it easy is a potential timeframe on when to look for potential interest rate cuts. A market friendly US inflation report this week is not necessarily going to provide that clarity in the same way that the Fed meeting last week, and the monthly employment report were also unable to provide.
This is why in our view trader impatience in the way of what should be good news for markets being digested as bad news is likely to become a repeating theme to watch for global markets.
BoE meeting main event contender of week
The Bank of England is expected to raise UK interest rates to the highest level since 2008 later this week, with another 25-basis point increase. Some will argue that the persistence of inflationary pressures running higher than any other G7 nation requires more to be done and a larger rate increase by the Monetary Policy Committee would be applauded to some degree.
We should expect BoE policymakers to be heavily quizzed as to why the UK central bank has taken such a cautious approach towards tackling inflation. If the BoE had not been as cautious when it became clear as early as more than a year ago how fast inflation was set to rise and raised interest rates at a faster pace, then perhaps the UK economy would not still be staring at headlines such as encountering the highest inflationary pressures in the G7.
Some unexpected hawkish language from the BoE might be able to push the Pound to its highest levels against the Dollar since April 2022.
Now that the Pound/Dollar has managed to cross 1.26 after gradually making its way through 1.25 over the last week, 1.28 in the Pound is possible before the end of the current quarter. 1.25 is likely to now act as a line in the sand for sellers, although from the element of UK fundamentals the BoE now being aggressive enough to tackle inflation while the UK consumer economy risks tanking would be a cause for concern to market sentiment.
Oil attempts recovery but $75 attempt ambitious
Considering that central bank officials appear far more comfortable providing a narrative that there is hope recessions can be avoided, the widespread selling that commodities like Oil suffered last week was very much over the top.
The sell-off last week that included sessions such as Oil suffering its heaviest daily loss since January at the same time that officials are providing a somewhat optimistic stance towards long-standing recession worries is an opportunity for traders to look for some discounts.
Expect for Oil to attempt a consolidation and gradual recovery of last week’s losses through upcoming trading sessions, though market sensitivities over issues such as what is taking place within the banking sector and macro data releases will likely prevent a stay towards $75.