Debt Deal Jitters & China Confusion 😬

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GM and BRRR. The mood on Wall Street has soured in early trading today, as weak Chinese manufacturing data hit the tape and jitters over the debt ceiling deal have emerged.

The Chinese data suggests that their economy and overall demand is more sluggish than expected. Analysts forecasted a significant surge in economic activity in China as they have started to fully remove their heavy-handed COVID restrictions.

Domestically, passage of the Debt Ceiling agreement is far from a sure thing.

To broadly characterize sentiment, both centrist Republicans and centrist Democrats support the deal, while principled conservatives and principled liberals oppose it. The House of Representatives votes later this evening.

And finally, we’d like to highlight data out of Europe as another strong indicator that inflation is rapidly disappearing. Germany reported CPI at 6.3% y/y vs 6.7% expected and 7.6% last month and Spain reported CPI at 2.9%. We expect inflation data to continue to surprise to the low side, giving Central Banks an alibi to inject liquidity sooner than anyone thinks.

Here’s what we BRRR’d today:

• Early Market Sentiment & News

• Republican Bicker Over Debt Ceiling Deal

Early Market Sentiment & News

• Economic concerns cause futures slump: US equity futures took a hit after discouraging economic data from China. Chinese manufacturing and service PMI data failed to meet expectations, leading to a significant drop in Asian markets and a negative impact on European stocks.

• European inflation weakens and the US economy faces risk: European inflation demonstrated weaker than expected results in France and Germany, leading traders to reassess future ECB rate hikes. In the meantime, bonds are pricing in a 66% chance for a rate hike at the Federal Reserve's June meeting. These developments have led to worries about the potential for a US recession and stagnation in the Euro region.

• Asia-Pacific equities decline due to China's struggling economy: Asian equities faced a significant drop led by shares listed in Hong Kong, as China's weaker-than-expected manufacturing data highlighted ongoing economic struggles. This led to the MSCI Asia Pacific Index falling by up to 1.4%, with Chinese stocks in Hong Kong and the city’s benchmark index entering bear markets.

  Zerohedge

Republicans Bicker Over Debt Ceiling Deal

• Opposition within Republicans: House Speaker Kevin McCarthy (R–Calif.) is facing opposition from the right-wing faction of the House Republican caucus, including Rep. Chip Roy (R–Texas) who expressed clear rejection of the debt ceiling bill.

• Debt Ceiling Increase and Republican Criticism: The U.S. House of Representatives passed the Limit, Save, Grow Act of 2023, raising the debt ceiling by $1.5 trillion or until March 2024. Critics argue that the proposed $480 billion annual spending reductions will be less than expected, as the bill lacks specific spending cuts.

• Consequences of Deficit Spending and Inflation: Deficit spending often leads to higher inflation. Without balancing the budget, interest payments on the national debt, currently about 7 percent of all federal outlays, will continue to increase, possibly necessitating future cuts to programs such as Social Security and Medicare.

• Disappointment over IRS Funding Cut: The House Freedom Caucus expressed dissatisfaction with the deal’s failure to secure a larger cut to the Internal Revenue Service's funding, reducing only a quarter of the $80 billion increase given to the IRS last year.

• Potential Legislative Roadblock: As the deadline to prevent a federal government default approaches, it remains uncertain whether the House Freedom Caucus can effectively block the bill in the House Rules Committee. The group's members negotiated more seats on this powerful committee during the McCarthy leadership election standoff.

  Mises Institute & Reason

AI ART OF THE DAY

Today’s AI Art of the Day features Janet Yellen fighting inflation in a post-apocalyptic debt ceiling default scenario. Only on The Brrr.

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