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[Quick Facts]

1. The upward revision for U.S. GDP supports further rate hikes.

2. U.S. initial jobless claims last week hit the largest drop in 20 months.

3. Congressional Budget Office raises federal debt forecast for 2023-42.

4. The U.S. considers ATACMS long-range missile system to bolster Ukraine.

5. EU reaches a provisional deal to unify stock trading data.

6. Bostic does not rule out the need for further rate hikes in the coming months.

[News Details]

The upward revision for U.S. GDP supports further rate hikes

The U.S. Bureau of Economic Analysis (BEA) released an upward revision to the final annualized GDP rate for the first quarter from 1.3% to 2%. The GDP was revised upward mainly because consumer spending and export data were revised upward, and inventory investment was weaker than expected. The upward revision for GDP reinforced market expectations for the resilience of the U.S. economy, and a resilient economy also means sticky inflation. The recently released Federal Reserve stress test results showed that large banks are able to absorb losses from the recession and falling real estate prices, which reduced investors' concerns about financial risks.

U.S. Treasury yields rose and the U.S. dollar appreciated after the GDP data was released, indicating that investor expectations for higher interest rates and staying there for longer were reinforced.

U.S. initial jobless claims last week hit the largest drop in 20 months

U.S. initial jobless claims unexpectedly fell to 239,000 on Thursday, reversing a recent jump, according to the Labor Department. This follows three consecutive weeks of initial jobless claims hovering near the highest level since October 2021. It has led the market to believe that layoffs are increasing as the economy begins to be affected by the Federal Reserve's sharp rate hikes.

But this biggest drop in initial jobless claims in 20 months is the latest sign that the economy is resilient and could drive the Fed to raise interest rates in July.

Congressional Budget Office raises federal debt forecast for 2023-42

The U.S. Congressional Budget Office (CBO) released its Long-Term Budget Outlook for 2023 on Wednesday, updating its projections for the federal budget and economy over the next 30 years.

Deficit: In the CBO's projections, the deficit equals 5.8% of GDP by 2023, which will decline to 5.0% in 2027. Then the figure will grow each year to reach 10.0% of GDP in 2053. Such a level has been exceeded only during World War II and the COVID-19 pandemic over the past century. The increase in the overall deficit is due to spending growing faster than revenues. The primary deficit excluding interest costs equals 3.3% of GDP in both 2023 and 2053, but the total deficit is boosted by rising interest costs.

Debt: By the end of 2023, federal debt held by the public equals 98% of GDP. It will surpass its historical high in 2029 when it will reach 107% of GDP, and climb to 181% of GDP by 2053. Such high and rising debt would slow economic growth, push up interest payments to foreign holders of U.S. debt, and pose significant risks to the fiscal and economic outlook; it could also cause lawmakers to feel more constrained in their policy choices.

Spending: In 2023, outlays fall to 24.2% of GDP as federal spending in response to the pandemic diminishes. Outlays will continue to decline through 2026 but increase thereafter, reaching 29.1% of GDP in 2053. (By comparison, from 1993 to 2022, outlays averaged 21.0% of GDP.) Rising interest rates and persistently large primary deficits will cause interest costs to almost triple in relation to GDP between 2023 and 2053. Spending on the major health care programs and Social Security—driven by the aging of the population and growing health care costs—will also boost federal outlays significantly over the next 30 years.

Revenues: Revenues fall to 18.4% of GDP in 2023 and will continue to drop until 2026 when the scheduled expiration of certain provisions of the 2017 tax act will cause tax receipts to increase. Revenues will generally rise thereafter, reaching 19.1% of GDP in 2053, as an increasing share of income will be pushed into higher tax brackets. (By comparison, from 1993 to 2022, revenues averaged 17.2% of GDP.)

Measured as a percentage of GDP, federal debt is now projected to be 2 percentage points higher in 2023 and 9 percentage points lower in 2052 than it was in last year's report. Overall, CBO's projections of debt have increased through 2042 and decreased in later years.

The U.S. considers ATACMS long-range missile system to bolster Ukraine

The United States is close to approving the deployment of a long-range missile system in Ukraine that could shift the tide of the war in Kyiv against Russia in Ukraine's favor. The Army Tactical Missile System (ATACMS) has a range of about 190 miles, which is enough to allow Ukrainian forces to strike Russian targets far behind the front lines.

Biden has not yet approved the transfer of the weapons, in part because U.S. officials fear Ukraine could use them to attack Russian territory and escalate the conflict into a broader one with the West. Officials said the decision is awaiting approval at the highest level. There are signs that the White House has recognized the urgent need to support the fight in Ukraine in the coming weeks.

EU reaches a provisional deal to unify stock trading data

The European Union cleared a significant hurdle toward unifying its financial markets with a provisional deal to create a consolidated tape of trading activity from across the region. The EU Presidency Sweden said EU member states and the European Parliament agreed to create a centralized data source for different assets, bringing together information from the many trading venues in the 27 EU member states. Once the deal is finalized, it will mean that for the first time, investors will be able to see the full picture of prices and volumes across the euro area.

Bostic does not rule out the need for further rate hikes in the coming months

Atlanta Fed President Raphael Bostic said on Thursday that the FOMC should expect inflation to continue to make progress even without further rate hikes. It would be wise to take some time to assess the impact of monetary policy tightening on the economy, as the policy has only been restrictive for eight or nine months. While in my view, I do not expect further rate hikes, I also do not expect a rate cut in 2023 or 2024. The need for further rate hikes in the coming months cannot be ruled out to avoid the risk of excessive tightening and draining the economy of too much momentum.

[Focus of the Day]

UTC+8 17:00 Eurozone HICP (Jun)

UTC+8 20:30 U.S. Real Personal Consumption Expenditures MoM (May)

UTC+8 20:30 U.S. PCE (May)