The economy averted a crisis over the weekend when President Joe Biden signed legislation to extend the nation’s borrowing capacity for two years.
This week figures to be less dramatic with a relatively thin amount of economic news ahead of another key meeting of the Federal Reserve in eight days.
On Sunday, in another move that helps in the battle of inflation and may play a role in the Fed’s thinking, the OPEC oil-producing nations agreed to keep in place their production cuts while influential member Saudi Arabia said it would cut output by a million barrels a day for one month in July.
That should keep a lid on oil prices, now hovering around $70-75 a barrel. Oil did rally after the announcement but is trading Monday morning around $73 a barrel. Brent crude, the international benchmark, was trading at about $77, down from $120 a year ago.
Cartoons on the Debt Ceiling
Attention is now on the central bank’s June meeting, beginning June 13 and lasting two days. At the Fed’s May meeting, where interest rates were increased by a quarter point, there was a clear hint that a pause may be coming as officials assess the effects of a year of monetary policy tightening. The fallout from the March banking crisis and uncertainty over the resolution of the debt standoff in Congress hung in the air over the decision.
Now, it’s a different concern. Recent inflation data has shown it is proving sticky, especially in the services sector of the economy. And Friday’s blockbuster job numbers, where the May reading of 339,000 handily beat expectations, has taken the spotlight as the worry of the moment. Even though many experts saw weakness in the underlying details, there’s no question that the labor market is proving extraordinarily resilient in the face of tighter bank credit and borrowing costs.
“Overall, the May jobs report keeps a Fed pause in play at next week’s June FOMC meeting,” EY Senior Economist Lydia Boussour said after the report’s release. “But hawkish Fed commentary and excessive data reliance mean that the door remains open to a possible rate hike.”
“If the upcoming CPI (consumer price index) report (due out on the first day of the FOMC meeting) proves hotter than expected, it could push the small majority of policymakers in favor of a ‘hawkish pause’ to join those favoring another rate hike,” she added.
Markets will also be facing the likelihood of a tsunami of new Treasury borrowing now that the debt limit has been raised. That could introduce added volatility to bond markets already grappling with the Fed’s interest rate hikes and concerns over a recession in the second half of the year.
“It is the desk’s estimate that the Treasury will try to rebuild the TGA (its main account) to about $600 billion or $700 billion of a standing balance,” Brandon Brown, vice president on the short-term trading desk at Goldman Sachs said ahead. of the debt deal’s resolution. “But then that’s on top of the normal issuance used for normal government spending. We believe the market’s estimates are actually a little bit above $1 trillion of bills, maybe up to $1.2 trillion of bills, to come.”
Brown said he expects the issuances to be handled in a smooth fashion, with money market accounts stepping in to sop up some of the excess offerings.
Joan Feldbaum-Vidra, managing director at Kroll Bond Rating Agency’s Sovereigns Group, says “There’s likely to be some volatility but we’re not concerned.”