No one was naïve enough to expect an agreement on the US debt ceiling yesterday, when US President Joe Biden met Kevin McCarthy.

US treasuries remain under a decent selling pressure especially at the short end of the yield curve as investors dump US short term papers due to the rising US default risk. Gold gained, as equities slid.

The US will reveal a much-important update to its CPI today, and the data could also shake sentiment at today’s trading session.

Core inflation is expected to have slightly eased from 5.6% to 5.5% in April, headline inflation is seen steady at 5%, while we might see an uptick in monthly headline figure, to 0.4% from 0.1% printed a month earlier due to the spike in energy prices after OPEC cut production last month.

A CPI report in line with expectations will keep focus on debt ceiling, but a report that diverges from expectations could give an extra spin to market pricing. A softer-than-expected CPI report should further fuel the Fed rate cut expectations into this fall and relieve a part of the positive pressure on US yields, whereas a stronger-than-expected read will hardly boost any hawkish bets.

High inflation could also mean lower appetite for oil.

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The week started on a mixed note. Bank stress further eased with PacWest and Western Alliance, which were the two banks that were on the chopping block after the First Republic Bank got swallowed by JPM, rallied, but gave back most of earlier gains.

Federal Reserve’s (Fed) senior loan officer opinion survey came in worse than expected. The data showed that the banks who tightened credit conditions were higher than expected, around 46%, versus 44.8% expected.

On the political front, tensions regarding the US debt ceiling impasse remain high as US President Joe Biden meets congressional leaders today to discuss about a possibility to lift the debt ceiling to avoid a default which could hit the US as early as June 1st.

While suspense is killing everyone, Bill Gross, Pimco’s ex CIO says it’s a good idea to buy short term US papers at the current prices, as the debt ceiling discussion is ‘ridiculous, it always gets resolved’. Buying one, two-month treasury bills at a much higher rate than longer term papers is a good opportunity, according to him.

In FX, the US dollar outlook remains soft due to the bank stress and the debt ceiling impasse, which both increase the chances of slower growth and soften the Fed expectations.

In energy, American crude advanced past $73.50 per barrel yesterday, but slipped below the $73 level on worries that the Chinese recovery may not be as strong as predicted, and that slower global growth could further hit demand. Price advances into $75/76 will likely see strong resistance.

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Strong jobs data reversed expectation of a Federal Reserve (Fed) rate cut in July on Friday.

The US 2-year yield rebounded from last week’s lows, but the dollar index remained offered at session highs, on the unresolved US debt ceiling debate, and despite some relief on regional banks front.

US President Biden will meet some congressional leaders this week but will unlikely compromise on spending.

On the economic calendar, investors will focus on US CPI report, due this Wednesday, and Bank of England (BoE) rate decision, due Thursday.

Cable tests the ceiling of a long-term down-trending channel, as economists and markets can’t agree on what the Bank of England (BoE) should do, or what it WILL do.

Economists bet for one more rate hike from the BoE and pause, whereas the interest rate markets price in a 25bp hike this Thursday, followed by one, and possibly two more rate hikes until September.

In equities, the S&P500 closed with a 1.85% gain on Friday, as US regional banks closed a turbulent week with a decent rally. PacWest shares rallied more than 80%, Western Alliance jumped nearly 50% and SPDR’s regional bank index was up by more than 6% on Friday.

US crude jumped nearly 4% on Friday, along with the US equities, but upside potential in US crude will likely remain capped near $75/76, region that shelters the 50 and 100-DMA.

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The ECB slowed the pace of rate hikes to 25bp this month, bt left the door wide-open to more rate hikes in the coming months.

The growing divergence between the ECB and the Fed policy outlooks builds a stronger case for a significantly higher euro against the US dollar; price pullbacks continue to be interesting opportunities to strength long positions in the single currency.

In the US, stress around the US regional banks don’t seem to be abating. Lately on the chopping block are PacWest and Western Alliance, that lost 50% and 38% respectively yesterday.

US banks slid close to 3% yesterday.

Bank stress fuels Fed doves. As of today, the market is not only expecting three rate cuts in the second half of this year, but price in the first potential rate cut for July.

Happily, Apple results gave a smile to investors after the bell. Apple’s overall sales fell for the second quarter in a row, but iPhone sales were stronger than expected and helped Apple beat both revenue and profit expectations.

Apple’s share gained 2.5% in the afterhours trading.

Today, investors will closely monitor the US jobs data. A soft NFP read, and ideally softening wages growth could further fuel the Fed doves and boost Fed rate cut expectations.

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As expected, the Federal Reserve (Fed) raised the interest rates by another 25bp yesterday, and hinted at an eventual pause ‘to wait and see’ what happens from now.

Fed Chair Powell said that ‘conditions in the banking sector improved since early March’.

BUT PacWest, another US regional bank, saw its share price slump by more than 50% in the afterhours trading, after the bank announced that it considers strategic options like a breakup, capital raising or a sale.

Equities and oil sold off, as US yields tumbled and gold rallied.

Today, the European Central Bank (ECb) is also expected to announce a 25bp hike when it meets today. But the ECB Chief Christine Lagarde will certainly not announce the end of the rate hikes in the Eurozone.

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