Marketmind: US debt drama crashes Japan’s G7 party

A look at the day ahead in European and global markets from Kevin Buckland.

U.S. Treasury Secretary Janet Yellen is highlighting three core priorities at the start of the G7 finance ministers’ three-day meeting in Niigata, Japan today: reining in global inflation, bolstering long-term economic resilience, and redoubling a commitment to Ukraine.

But almost everyone also wants to hear from her that the United States can sort out its own debt ceiling conundrum and avoid a potentially disastrous default.

The Japanese setting is particularly appropriate, with the host nation being the world’s biggest holder of U.S. debt.

Up against the limit,

The bipartisan standoff already delayed the start of Yellen’s trip so that she could personally ring up U.S. business executives and appear on major TV shows to warn of the dangers of not lifting the $31.4 trillion borrowing cap by the “X” date, ostensibly on June 1.

With time very tight, President Joe Biden has signalled the chance of cancelling his trip to the Japanese city of Hiroshima for the following weekend’s G7 summit if the issue is not resolved.

Debt ceiling uncertainty continues to cast a pall over markets, with most Asian equity benchmarks weak again on Thursday.

The United States isn’t the only concern either. Chinese inflation data showed consumer prices almost flat-lining in April, while factory gate deflation deepened.

It adds to worries about flaccid domestic demand, which had already been exacerbated by a shock decline in imports in data earlier in the week, dashing hopes that China’s COVID-19 reopening could invigorate global growth.

At least investors could take some comfort that the U.S. Federal Reserve is almost certainly through with interest rate hikes after continued easing of consumer inflation in the latest reading overnight. The next test of that hypothesis is producer price data later in the day.

Ten-year Treasury yields continued to tick lower in Tokyo, putting the U.S. dollar under pressure against the yen.

The Bank of Japan continued to send the same mixed signals, with minutes of last month’s meeting showing policymakers agreeing that progress is being made toward its 2% inflation target, but also that stimulus needs to stay in place amid all the global macroeconomic uncertainty.

The Bank of England, of course, takes the spotlight in European hours, with expectations for a 12th consecutive rate hike buoying sterling to a one-year peak.

Key developments that could influence markets on Thursday:

G7 finance ministers meeting running May 11-13

BOE policy announcement at 1100 GMT

US PPI at 1230 GMT

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