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US stocks are edging lower amid debt ceiling uncertainties, hawkish Fed comments & ahead of PMI data.

US futures

Dow futures -0.20% at 33226

S&P futures -0.27% at 4182

Nasdaq futures -0.3% at 13810

In Europe

FTSE +0.24% at 7798

Dax -0.33% at 16175

• Debt deal talks continue with no deal agreed
• Hawkish Fed policymakers see more rate hikes
• Lowe’s downwardly revises FY sales outlook
• Oil edges high ahead of API data 
   

Debt ceiling talks, hawkish Fed comments & weak earnings

Wall Street is pointing to a weaker start amid ongoing uncertainty surrounding U.S. debt ceiling negotiations and as investors look ahead to PMI data.

Monday's meeting between President Joe Biden and House Speaker Kevin McCarthy brought with it both good and bad news. The meeting ended without an agreement to lift the 31.4 trillion U.S. debt limit. However, both sides said that progress had been made. Developments in talks will remain in focus, with a pledge to talk every day.

The X-date is early June when Treasury Secretary Janet Yellen said that it is highly likely that her department could run out of cash. Given the long bank holiday weekend at the end of the week, the clock is definitely ticking. The closer to the X-date, the more we can expect the default risk to show in the market.

Also weighing on the market mood were hawkish comments from the Federal Reserve policymakers. St Louis Fed President James Louis, a known hawk, said that he expected two more rate hikes. Meanwhile, Minneapolis Fed President Neel Kashkari said that rates could continue to rise even if the Fed pauses in June.

Looking ahead, US PMI data is due to show that services and manufacturing activity are expected to fall amid the fallout from high inflation and interest rates. Manufacturing PMI is expected to ease to 50 from 50.2. Services is expected to ease to 52.6 from 53.6.
 

Corporate news

Retailer Lowe’s earnings disappointed and are weighing on sentiment. The DIY retailer saw sales fall 4.3% and now expects full-year sales to be 2% - 4% lower.

Alibaba falls after announcing that its cloud division has started to cut jobs. The firm could reduce total workforce by up to 7%. The aim is to streamline the business ahead of an IPO.
 

Dow Jones outlook – technical analysis

The Dow Jones continues to trade below the multi-month falling trendline. More recently, it trades range bound, although the RSI and a break below the 50 sma could suggest that sellers have the upper hand. Bears will look for a break below 33,000 to extend the selloff toward 32500. Meanwhile, should the 50 sma hold, buyers could look for a 33350, last week’s high, to bring 33,750 into target, last week’s high and 33950 the falling trendline resistance.

(Click on image to enlarge)

FX markets – USD rises, GBP falls

The USD is rising, tracking yields higher after hawkish comments from Fed speakers and as investors continue watching US debt ceiling negotiations which appeared to bring both good and bad news.

EUR/USD is falling against the stronger USD, after PMI data showed that business activity grew at a slower pace in May, owing to a steeper-than-expected contraction in manufacturing. The manufacturing PMI fell to 44.6 and the composite PMI slipped to 53.3.

GBP/USD is falling despite the IMF saying that it no longer expects the UK to fall into a recession this year. The IMF upwardly revised its growth outlook to 0.4% in 2023. Separately BoE Governor Andrew Bailey said that inflation had turned a corner; his comments come as food inflation cools slightly to 17.2% and service sector inflation increased at a rapid pace in May, but was down from its peak.

EUR/USD -0.3% at 1.0788

GBP/USD -0.4% at 1.2388
 

Oil edges higher ahead of API data

Oil prices are edging higher for a second straight session as macro sentiment remains the key driver for oil prices. US debt ceiling talks remain in focus with no deal yet, and investors are also weighing up the Fed’s next move, along with a seasonal increase in gasoline data.

Whilst there is no debt ceiling deal on the table, the risk remains that the US could default on its debt. Oil markets remain jittery over how such a scenario and the economic fallout could hurt the oil demand picture. That said, talks are being called productive, which is encouraging.

Crude oil is also being supported by a 2.8% increase in US gasoline futures on Monday, as investors are here look ahead to Memorial Day on the 29th of May, which traditionally marks the start of the peak summer driving season.

Planned US purchases to refill US SPR reserves are also supporting the oil prices. SPR reserves are being refilled after sales last year to help stabilize the price post the Russian invasion of Ukraine

API create inventory data is due later today. Expectations are for a small rise in crude stockpiles.

WTI crude trades +0.2% at $71.90

Brent trades at +0.13% at $75.62
 

Looking ahead

14:45 US PMI data

15:00 US New Home Sales

21:30 API crude oil stock piles

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