1. US Policymakers' Ongoing Struggle to Avoid Default
2. Mixed Signals Impacting Market Sentiment
3. Upbeat US Data Strengthens Hawkish Fed Bias
4. Comments from Fed Policymakers Influence Risk Profile
5. Key Factors Affecting Market Moves
US Policymakers' Ongoing Struggle to Avoid Default
The market sentiment has taken a turn for the worse as US policymakers continue their efforts to avoid a default but have yet to offer a much-awaited deal. Despite the hopes of reaching an agreement, uncertainty looms as the deadline approaches.
Mixed Signals Impacting Market Sentiment
Early on Friday, the risk profile remains downbeat as concerns about the US debt limit expiration send mixed signals to the market. Additionally, there is a cautious mood ahead of the Federal Reserve's preferred inflation gauge and the US Durable Goods Orders for April. S&P500 Futures indicate mild losses around 4,150, erasing the previous day's corrective bounce. Meanwhile, the US 10-year and two-year Treasury bond yields hover near the highest levels since early March, at approximately 3.82% and 4.54% respectively. The US Dollar Index (DXY) retreats from a 2.5-month high to 104.17, and gold prices show a corrective bounce near $1,947.
Upbeat US Data Strengthens Hawkish Fed Bias
Positive US data releases contribute to a more hawkish Federal Reserve bias, impacting market sentiment further. The second estimation of the US Annualized Gross Domestic Product (GDP) for Q1 2023 has been revised up to 1.3% from the initial forecast of 1.0%. Additionally, the Chicago Fed National Activity Index for April improved to 0.07, surpassing the prior reading of -0.37 and the market estimations of -0.02. The Kansad Fed Manufacturing Activity also showed improvement, registering -2 in May compared to the previous reading of -21 and analysts' estimations of -11. While the US Pending Home Sales for April improved on a year-over-year basis, they experienced a slight decline on a month-over-month basis. The Core Personal Consumption Expenditures rose to 5.0% during the preliminary readings, up from the previous 4.9%.
Comments from Fed Policymakers Influence Risk Profile
Mixed comments from Federal Reserve policymakers contribute to the hawkish bias surrounding the US central bank and impact the overall risk profile. Richmond Fed President Thomas Barkin stated that the Fed is currently testing and learning to understand how slowing demand affects inflation. In contrast, Boston Federal Reserve President Susan Collins suggested that the Fed may be close to or at the time to pause interest rate increases.
Key Factors Influencing Market Dynamics
The ongoing struggle of US policymakers to reach a deal on the debt ceiling extension has become a significant factor impacting market dynamics. With a $70.0 billion gap remaining to be filled by negotiators, the lack of agreement has raised concerns. House Speaker Kevin McCarthy acknowledged the challenges, stating, "It's hard. But we're working and we're going to continue to work until we get this done." The US Treasury Department continues to highlight the risks of a potential recession if a deal is not reached before June.
Additionally, the positive US economic data releases have bolstered the hawkish sentiment of the Federal Reserve and further influenced market dynamics. The upward revision of the second estimation of the US Annualized Gross Domestic Product (GDP) for Q1 2023 to 1.3% from the initial forecast of 1.0% reflects a stronger-than-expected economic performance. Furthermore, the improved Chicago Fed National Activity Index for April, along with the Kansad Fed Manufacturing Activity index, indicates positive momentum in the manufacturing sector.
US Dollar Remains Firm and Antipodeans Experience Significant Decline
In the foreign exchange market, the US Dollar continues to demonstrate strength, maintaining its firm position against other major currencies. Meanwhile, the antipodean currencies, including the Australian Dollar and the New Zealand Dollar, have experienced a notable decline. The robustness of the US Dollar can be attributed to the hawkish sentiments of the Federal Reserve, combined with the concerns surrounding the US debt ceiling negotiations. Market participants are closely monitoring these currency movements, as they provide valuable insights into the overall market sentiment and risk appetite.