The Week in Markets – Relief for the Markets after US Debt Deal and Likely Fed's June ‘Skip’

In this episode of The Week in Markets Magdalene Teo, Head of Fixed Income Research Asia, talks about the resolution of the debt deal in the US and key payroll data releases. Under the deal, the US government’s USD31.4trn debt ceiling would be suspended until 1 January 2025. With US default averted, the Treasury market can look to an avalanche of treasury bills to be issued in the next six months. The treasury bills will likely be absorbed by monies sitting in the money market funds. Outflows from bank deposits will likely lead to an increase in bank refinancing costs. Overall, the debt deal is less restrictive than expected for discretionary and mandatory spending. However, the deal does not reverse the trend to a higher debt-to-GDP ratio with the US spending an even higher share of its revenues for debt service in ten years. The positive news from the debt deal was however slightly offset by the US labor market showing strength. Prior to the release of the jobs data, US treasuries saw a rally after two Federal Reserve governors argued for an interest rate pause to allow the board to assess more economic indicators following the past months of tightening. The overall message is that a ‘Hold’ is not an end of the tightening. The market has now priced in a ‘skip’ in June and a good chance of a hike in July. Over to Asia, we saw some supportive policy news from China over the weekend providing a lift to equities and commodities on Monday. As expected, the government signalled targeted steps to boost the economy following the economic data print for May, focusing on the preferred sectors rather than a major stimulus like before. Trading activity is expected to be light as we approach the start of summer with investors leaning towards quality bonds while eschewing credit risks.