Debt Ceiling Agreement & Disinflation Signals Lead Treasury Yield Retreat

Sovereign yields fell on both sides of the Atlantic last week with support coming from the combination of a debt ceiling agreement in Washington, and signs that manufacturing input prices were starting to cool. Regarding the former point and after weeks of intense negotiations, the White House and Republican leaders finally agreed to raise the US debt limit, avoiding what would have been an incredibly damaging government default[1]. Further support for sovereign bonds came in the form of the latest Purchasing Managers Index (PMI) data which revealed that the prices paid for input materials by US manufacturers fell at the fastest pace since December during May[2]. The short dated one month US treasury bill saw its yield fall by 74 basis points (bps) versus the prior Friday’s close to 5.28% whilst the closely watched 10-year security retreated by 12bps to 3.69%.

US equity markets were buoyed by the information, the S&P 500 and NASDAQ concluding the week +1.8% and +2.0% higher respectively. It was the sixth straight week that the NASDAQ made positive ground. In Europe, the MSCI Europe ex UK index was largely flat, falling by a modest -0.1% despite encouraging inflation data where it was revealed that headline CPI declined by 90bps to 6.1% during April. Across the Channel, the FTSE 100 was also little changed with the main index falling by -0.3%. As for the mid-cap centric FTSE 250, it jumped by +1.9% thanks in part to Sterling strength during the week. Meanwhile in Asia, the Nikkei 225 in Japan and Chinese Shanghai Composite also advanced. The Nikkei reached its highest level for 33 years thanks to a +2.0% gain whilst the Chinese benchmark rose by +0.6% on growing expectations of further government stimulus.

Moving to commodity markets, brent crude oil recorded a weekly loss of -1.1% (to $76 a barrel) despite a +2.0% jump on Friday. Prices ended the week on strong footing on the back of the debt ceiling agreement in addition to expectations that OPEC would introduce additional production cuts. This was confirmed over the weekend with Saudi Arabia pledging to cut its output by 1 million barrels per day next month in the latest attempt to boost prices. Elsewhere, the gold price inched +1.3% higher to $1,965 an ounce on US Dollar weakness with copper also rising, the metal gaining by +1.6% to $8,234 a tonne[3].

Week Ahead

After a busy couple of weeks, this week is much quieter on the data front. Final PMI’s covering May are due from both the UK and the Eurozone, the latter also seeing retail sales and revised Q1’23 GDP data released later in the week. The British Retail Consortium (BRC) publishes its own sales monitor for retail sales on Tuesday morning. In the US, the Institute for Supply Management’s PMI equivalent for the services sector is the key figure to keep an eye on this week. Asian focus will be on CPI and PPI inflation in China and the final revision of first quarter GDP[4].

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[1] T. Rowe Price, 05/06/23

[2] Institute for Supply Management, 05/06/23

[3] Refinitiv, 05/06/23

[4] Forex Factory, 05/06/23

SJP Approved 05/06/23