The two sides still far apart as the US debt X-date approaches. Modest market movements in a quiet start to the week; US Treasury yields push higher; US equities push higher. NZD tracks sideways

It has been a quiet start to the week, with modest changes in asset prices, ahead of the next meeting between Biden and McCarthy on the debt ceiling. US Treasury yields are slightly higher, weighing on the yen, while US equities show small gains. The NZD has tracked sideways in a 0.6260-0.6290 zone.

President Biden and House Speaker McCarthy will meet later this morning on debt ceiling negotiations after the snag hit over the weekend, with both parties seemingly still far apart. Ahead of the meeting McCarthy told reporters that the negotiating teams’ discussions earlier today were productive, adding “we’re going to continue working…we’re not at a deal”. The market continues to optimistically assume that a deal will be reached in time, with analysts estimating 7-9th of June might be the crunch time on paying the bills. But the tail risk of a debt default, with significant market consequences, cannot yet be ruled out. As at Thursday, the US Treasury’s cash balance was just $57b.

Messages from FOMC members continue to be mixed, with a clear split between those who are happy to sit on the sidelines after 500bps of rate hikes and those keen to signal more work to do.  St Louis Fed President Bullard still advocates more rate hikes, saying “I’m thinking two more moves this year…sooner rather than later”. Minneapolis Fed President Kashkari said for him a June rate hike was a “close call”, adding he’d be comfortable with a pause in June but the important thing to do is “not signalling that we’re done”. San Francisco Fed President Daly suggested a more cautious approach from here saying “it is prudent to resist the temptation to say what we are going to do for the rest of the year” and adding that a pullback in bank lending could be worth as much as a couple of rate hikes.

Economic news has been scant. Euro area consumer confidence continued to trend higher, with the reading of minus 17.4 in May at a 15-month high, even if a touch weaker than expected.

US equities show small to modest gains, with the S&P500 barely higher, showing some resistance near 4200 and the Nasdaq index continuing to outperform. US Treasury yields are about 5bps higher across the curve, continuing the trend of higher rates.  The 10-year rate is up for the seventh consecutive trading session, taking it to its highest level since mid-March of 3.72%.

Currency movements have been modest, the only notable mover being a weaker yen on the higher US rates backdrop. The NZD has traded a 0.6260-0.6290 range on round figures and the AUD is flat at 0.6650.  NZD/JPY is trading near its highs for the year just over 87.

The domestic rates market showed a modest retracement following last week’s brutal sell-off, where fundamental forces met a wrongly positioned market that exacerbated the move higher in rates. OIS pricing for this week’s RBNZ MPS fell 5bps to 5.58%, equivalent to a 32% chance of a 50bps hike, compared to the near-even bet between 25bps and 50bps priced at the close on Friday. The 2-year swap rate fell 6bps to 5.44% while the 10-year rate fell 1bps to 4.43%, a steepening in the curve that moved the 2s10s spread up from levels last seen during the GFC but still at a remarkable 100bps or so. A steepening bias was also evident for NZGBs with yields down 2-5bps across the curve, with real money investors attracted to the higher yields on offer.

In the day ahead, PMI data are released for Europe and the US.  The early-May readings are expected to show a closing of the gap in momentum for manufacturing and services across Europe (less contractionary for manufacturing, less expansionary for services). In the US, both manufacturing and services indicators are expected to show some slippage.