Debt ceiling deal, Fed rate path, Erdogan’s victory

© Reuters — Investors look ahead to a crucial vote in Congress on this weekend’s deal to lift the U.S. debt ceiling, with only days left until the world’s largest economy is expected to tip into a possible default. Meanwhile, the Federal Reserve’s future rate path is in focus, while Turkey’s lira slides against the dollar following the re-election of long-time president Recep Tayyip Erdogan.

1. Debt ceiling deal forged

U.S. Congressional lawmakers face a crucial vote on a tentative deal to raise the country’s $31.4 trillion debt limit and avoid a potentially catastrophic default.

The agreement, forged by President Biden and Republican House Speaker Kevin McCarthy over the weekend after weeks of political wrangling, will lift the debt ceiling until 2025 and cap non-defense spending for the next two years.

Both Biden and McCarthy said the accord is a child of compromise, although its terms have already received backlash from some members of their respective parties.

The so-called Freedom Caucus – a collection of hard-line conservative Republicans – criticized the deal for not including a number of deep spending cuts. Leftwing Democrats, meanwhile, have chastised Biden for conceding on too many key issues.

The Republican-controlled House of Representatives and the Democratic-controlled Senate are anticipated to vote on the deal later this week. All the while, the clock is still ticking toward June 5, when the Treasury Department now expects the federal government to run out of money to pay its bills.

2. Asian markets rise after debt limit agreement

Most Asian markets advanced on Monday, with in particular touching a more than three-decade high, as stocks were spurred higher by optimism over the debt ceiling deal and artificial intelligence.

The fraught negotiations over the borrowing limit in Washington had rattled investors in recent weeks, especially as officials warned that a U.S. default could have dire consequences for the global economy.

Asia’s stand-out performer was the Nikkei 225, which jumped at one point to its highest level since 1990. The gains were driven by chipmaking and technology shares, in a sign of persistently rosy hopes that a recent surge in interest in artificial intelligence will support the near-term performance of these companies.

Australia’s and the index also rose. However, the blue-chip in China dipped following lingering uncertainty over the country’s ongoing recovery.

Elsewhere, stocks in Europe edged up, although volumes were light with the U.K. and several other countries in the region closed. In the U.S., markets will be shuttered today for the Memorial Day holiday.

3. Oil prices dip 

Oil prices slipped into the red in muted holiday trading on Monday, as optimism over the debt ceiling agreement was tempered by renewed expectations that the Federal Reserve will carry on with its long-running campaign of hikes.

At 05:30 ET (9:30 GMT), the futures dropped 0.03% to $72.65 per barrel, while the contract inched down 0.18% to $76.84 a barrel. Both WTI and Brent posted increases of more than 1% last week.

The debt limit deal helped to reinvigorate hopes that the U.S. – the world’s largest economy and biggest oil consumer – will manage to avert a default that could potentially trigger a broader recession, although some analysts predict that it may allow the Fed to justify further increases to borrowing costs.

4. Fed policy in focus

Debate is swirling around whether policymakers will unveil an eleventh-straight increase in borrowing costs next month, or push pause on its rate hiking cycle.

A hotter-than-expected April reading of the Fed’s has helped to boost the case for further tightening, analysts at ING said. However, some members have previously signaled that they are open to keeping rates unchanged.

Officials still have more data to sift through before they meet in June, including the report for May. Economists predict that the closely-watched jobs report, due out on Friday, will show that the U.S. economy added 180,000 jobs in May, down from 253,000 last month.

5. Turkey’s Erdogan secures election victory

The Turkish slipped to a record low against the dollar on Monday, although stocks in Turkey rose, after President Recep Tayyip Erdogan secured an election that will see his long-standing tenure in power extended for another five years.

According to unofficial results, Erdogan garnered a little over 52% of the vote, in a sign of deep divisions in Turkey over his rule.

One of the pillars of Erdogan’s economic policy has been his refusal to back interest rate increases despite rampant double-digit inflation. Critics have said this decision flies in the face of orthodox economic theory and threatens growth.

Erdogan promised in the run-up to the vote that he would continue to cut rates if he is elected, adding that he expects prices to come down as well.

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