The Dollar rose last Friday, as U.S. consumer sentiment fell to a six-month low in May, following concerns over the U.S. government’s debt ceiling. The University of Michigan survey revealed that political uncertainty around raising the borrowing cap could trigger a recession. Equity markets retreated, reinforcing the bearish investor sentiment. This update covers the current state of the U.S. economy, including the risks associated with not raising the debt ceiling and the Fed’s monetary policy. It also highlights the recent developments in the cryptocurrency market.
The Debt Ceiling Issue:
The Congressional Budget Office issued a warning last Friday that the U.S. is at significant risk of defaulting on payment obligations within the first two weeks of June if the government’s $31.4 trillion debt ceiling is not raised. It added that payment operations will remain uncertain throughout May. The University of Michigan survey also highlighted extreme pessimism around the debt ceiling issue. Investors are concerned that political haggling over the borrowing cap could trigger a recession.
Fed’s Monetary Policy:
Fed Governor Michelle Bowman indicated in prepared remarks that the Fed is likely to raise interest rates further if inflation stays high. The consumer price index (CPI) and producer prices this week showed that inflation is slowing. The Fed is expected to stop hiking rates at its next meeting in June, and this has prompted longer-dated Treasury yields to track lower. The yield on benchmark 10-year notes was up 6.7 basis points to 3.464%, while the two-year Treasury yield was up 8.3 basis points at 3.989%.
Equity Markets:
The Dow Jones Industrial Average closed slightly lower, down 0.03%. The S&P 500 fell 0.16%, and the Nasdaq Composite lost 0.35%. Despite the bearish investor sentiment, better-than-expected earnings and hopes for a soft landing have kept a floor underneath equity markets. However, it remains to be seen how long the markets can hold up against the headwinds of the debt ceiling issue.
Focus on U.S. Retail Sales and Industrial Production Figures:
This week, the focus will be on U.S. retail sales and industrial production figures. These figures will shed more light on the state of the U.S. economy and may provide some insight into how the markets will perform in the coming weeks.
Digital Assets Market:
In the cryptocurrency market, most major digital assets declined last Friday to a new 2-month low, only to rebound over the weekend. Bitcoin (BTC) hit a fresh 2-month low at $25,800 on Saturday before rebounding more than $1,000 to trade at $27,200 on Sunday. It is currently trading just under the $27,000 handle at the point of this update. Ethereum (ETH) was also down to $1,737.40 last Friday, trading at its lowest price since March 28. Over the weekend, there was an attempt to take this coin lower, but it was unsuccessful before a wave of buying took ETH higher to trade at a high of $1,824.50 on Sunday. It is currently trading around $1,790 in early Asia trading.
