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[Quick Facts]

1. U.S. manufacturing activity contracted for the seventh consecutive month in May.

2. The U.S. House of Representatives has passed a debt ceiling bill.

3. Harker: Fed should stop raising rates, at least in June.

4. ADP makes rate hike expectations rise.

5. liquidity crisis may cause market concerns.

6. Bullard: prospects for continued disinflation are good, and continued vigilance is required.

[News Details]

U.S. manufacturing activity contracted for the seventh consecutive month in May

Data from the U.S. Institute for Supply Management (ISM) on Thursday showed that the manufacturing PMI fell to 46.9 in May from 47.1 in April. This is the seventh consecutive month that the index has been below the 50-year mark, indicating a contraction in manufacturing. It's the most durable contraction since the Great Recession. And new orders continued to slump amid rising interest rates, but the employment indicator rose to its highest level in nine months.

The continued weakness in PMI readings supports analysts' expectations that the economy will fall into recession this year. However, there have been several periods, including the mid-1990s and the mid- and late-1980s, when prolonged periods of PMI below 50 were not accompanied by a recession.

The U.S. House of Representatives has passed a debt ceiling bill

The U.S. Senate will consider a bill on Thursday to raise the ceiling for the government's $31.4 trillion debt, with just four days left to pass the bill and send it to Democratic President Joe Biden to sign into law, thus avoiding a catastrophic default.

The bill would temporarily remove the debt ceiling until Jan. 1, 2025. In exchange, the government will limit its spending.

Harker: Fed should stop raising rates, at least in June

Philadelphia Fed President Patrick T. Harker said in a speech yesterday that the Fed should not raise interest rates at its next meeting, despite the disappointingly slow decline in high inflation. He may change his mind if the monthly employment data released on Friday or inflation data released next week is much stronger than expected.

The economy is expected to grow less than 1% this year and the unemployment rate (currently at 3.4%) will rise to about 4.4%.

If unemployment rises faster than Harker currently predicts or inflation comes down faster, he could think the Fed will cut rates.

His baseline forecast is that interest rates remain unchanged, allowing time for inflation to fall. He favors maintaining what he currently sees as a "reasonably broad" path to avoid a possible recession if the Fed tightens policy too much.

The current interest rates are considered to be in restrictive territory and can stay there for some time. "We don't have to keep moving rates up, and then have to reverse course quickly."

ADP makes rate hike expectations rise

The ADP data released on Thursday showed that 278,000 new jobs were added, well above the expected 170,000. ADP also easily beat expectations last month (recording 296,000 jobs compared to 150,000 expected), which was also reflected in the strong payrolls data. Bias has been a powerful force in financial markets recently, so the market is likely to incorporate more upside risk into the upcoming non-farm payrolls data.

Following the release of the data, CME's FedWatch Tool showed that the probability that the Fed will leave rates unchanged in June is 66.8% and the probability of a 25 basis point rate hike is 33.2%.

liquidity crisis may cause market concerns

The U.S. government hit the debt ceiling of $ 31.4 trillion in January this year. The Treasury Department then took "unconventional measures" to avoid a debt default. By May 30, the amount available in the general account of the U.S. Treasury has been reduced to less than $40 billion.

Once the bill on the federal government debt ceiling and budget is signed into law, the debt ceiling impasse is temporarily eased. The U.S. Treasury will act quickly to fill this account, meaning the Treasury will put a lot of short-term Treasury bonds into the market, which will draw a lot of liquidity from the market.

As it stands now, the new Treasuries issued could reach about $1.4 trillion. If the U.S. government in the short term issues large-scale bonds and implement the current high-interest rates, it may attract a lot of money originally to be invested in other subjects or stored in banks. This will not only exacerbate the recent widespread deposit outflow from the banking sector, so that banks will face greater liquidity pressure but also may push up short-term loans and bond rates, raising funding costs for companies already under pressure in a high-interest rate environment.

Bullard: prospects for continued disinflation are good, and continued vigilance is required

In an article released Thursday titled "Is Monetary Policy Sufficiently Restrictive," St. Louis Fed President James Bullard pointed out that in terms of current macroeconomic conditions, interest rates are at the low end of a sufficiently restrictive range level. The prospects for continued disinflation are good but not guaranteed, and continued vigilance is required.

At the same time, he noted that where within the sufficiently restrictive zone should the policy rate be? And are there other factors to consider (e.g., financial stability)? Such assessments could be reflected in judgments by the FOMC going forward.

[Focus of the Day]

UTC+8 20:30 U.S. Non-Farm Payrolls (May)