Debt crisis behind us?

Global financial markets finally breathed a sigh of relief. This happened despite the fact that history has always shown that politicians have always managed to find a solution to the debt limit at the last minute. Nasdaq Composite grew by 2,2 percent. and was the highest since August last year.

Tentative agreement

The White House Administration and the Republican-controlled House of Representatives concluded a preliminary agreement on the extension and suspension of the debt limit. There was a lot of optimism in Kevin McCarthy's words on Saturday. He acknowledged that there is still much to be done, but added that this agreement, in principle, is worthy of the Americans. It has been called a "transformative" move to cut spending. Both sides expressed confidence that the House would pass them. Voting is scheduled for 31 May. Today is Memorial Day in the US.

Reportedly, 95% of respondents are in favor of this form of agreement. Republicans, who control the House of Representatives with 222 votes. Democrats have 213 votes.

Agreement includes a two-year agreement, which means the suspension of the debt limit until January 1, 2025 and includes a reduction in budget expenditure in the period 2024-2025. 886 billion will be spent on security in 2024. On the other hand, USD 703 billion will be directed to spending outside the defense area.

At this point, it's about convincing the "hard" factions of both political camps, but from the reaction of the markets, it can be concluded that a positive scenario is widely expected and close to realization.

Inflation accelerated

After Congress passes the deal, the next step for the Treasury Department will be to issue US Treasury bills - to replenish dwindling cash reserves. On May 25, the operating cash balance was $38,84 billion. This is the lowest level since September 2017.

If the deal goes through successfully, markets are likely to turn their attention to other risk factors. Full attention will shift to the next Fed meeting on June 13-14. Fed interest rate futures price over 60 percent. chance of a 25 bps rate hike. in June. They also assume rate cut by only 33 bp. by the end of the year. This is a drop from almost 70 bps. a month ago. This change took place after Friday's publications from the United States.

The latest macro data shows that inflation and spending in the US accelerated. The dollar appreciated a EUR / USD exchange rate equaled the level of 1,07.

This underscores constant price pressure and demand, which may cause Federal Reserve policymakers to lean towards further monetary tightening. The personal consumption price index, one of the Fed's preferred inflation indicators, rose 0,4% in April. A year ago, this indicator increased by 4,4%. Excluding food and energy, the so-called the core PCE index increased by 0,4% compared to the previous month and by 4,7% compared to April 2022.

Source: Łukasz Zembik, OANDA TMS Brokers