Drama (Queens) in Washington

Debt Ceiling Update

Closer analysis of the US Treasury's cash flows suggest that the x-date is more likely in July. Yellen is just doing her job.

Any of us that have been in the markets before has seen this movie many times.

Could it be different this time ?

It's political warmongering but for the debt limit not to get increased, we need to think about who would win from that not happening?

I can't think of anyone.

Regional Banks (US)

Small and mid-size US bank stocks are still under pressure and short-term cash is still flowing to money market funds.

Why ? The FED is pay 5% for 2 trillion dollars of short term funds under the reverse repo facility. Check out the counterparties qualified to lend to the best name at the best rate.

Yes that's 2+ Trillion USD daily. The rate the FED is paying reverse repo counterparties is 5% +.

Reverse Repo Counterparties

Japan Resurgent

• Global chipmakers expand in Japan as tech decoupling accelerates (FT)
• Japan stock index hits 33-year high investors warm to Tokyo story (FT)

In Case You Missed It

US Initial Jobless Claims trending higher despite non-farm payroll monthly stats.

Japanese CPI still climbing

European CPI still elevated

Australia

Board minutes from RBA policy meeting on 2 May. There were some very interesting statements (for once) and it's noticeable that the tone has changed considerably since the Treasurer threw them under the bus. And of course a second rate hike cycle.

RBA minutes from 2 May

International economy: "In particular, members observed that the outlook for monetary policy remains uncertain, as central banks balance uncertainty about the pace of disinflation with the possibility of further stress in the financial sector."

So disinflation now part of the global narrative.

Domestic economy: "Various factors might explain the weak productivity outcomes, including COVID-19-related disruptions and strong growth in employment in government-funded services, where achieving productivity increases is often difficult. "

And from later in the minutes

"Another upside risk to inflation was the possibility that productivity growth remains very weak. Members observed that the forecast for inflation to return to the top of the target band by mid-2025 was predicated on productivity growth returning to around the modest pace recorded prior to the pandemic. If this did not occur, growth in unit labour costs would be uncomfortably fast."

So lack of productivity creates inflation !!!

The RBA should really stick to "prices paid" or similar terminology, as inflation is a monetary phenomenon (inflation of money supply). We measure prices paid as the effect of inflation.

Also, on the hundreds of billions of A$ of Government debt sitting on the RBA balance sheet;

"Members reviewed the Bank’s approach to reducing its holdings of government bonds, which had been purchased during the pandemic to support markets and provide stimulus. As had been decided by the Board a year earlier, the strategy was to hold these bonds until maturity rather than selling them prior to that. This approach recognised that the Bank’s balance sheet was already set to decline rapidly given the maturity of funding under the Term Funding Facility, and that bond sales might complicate governments’ bond issuance and reduce the effectiveness of any future quantitative easing program."

First time we've heard of future QE

And finally:

"But, on balance, given the Board’s strong commitment to price stability and the importance of ensuring that inflation expectations remain anchored, members judged that a further increase in interest rates was warranted."

One year in, Albanese lacks a growth engine: CEOs

Housing slump to cut 61,000 construction jobs

Albanese government offers 10.5pc pay rise to public sector

Australians selling investment properties and refinancing mortgages ‘at a rate never before seen’

Numbers out in the last week tell us the consumer is not doing well, wages are still rising but manageable, and there were very bad employment numbers.

AUD / USD Trade Update

Short 0.7000

Short 0.7100

Short 0.6775

Stop 0.6825

Positive carry

The rejection at the scene of the crime, 0.6820, saw market drop 2 big figures to 0.6604 before a bit of a rally at the end of the week.

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