Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns! What if Russia didn't follow OPEC's output cuts?

Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns!  What if Russia didn't follow OPEC's output cuts?

The US 2-year yield fell sharply, while the S&P500 ended flat after hitting a fresh high since last summer on optimism that the US will finally agree to raise the debt ceiling.  


The House will vote today to decide whether the debt limit bill gets approved at time to get a Senate approval by next Monday deadline.  


The deal between Biden and McCarthy freezes discretionary spending for the next two years, which excludes weighty plans like Medicare or social care, and will only have a minor impact on around $20 trillion budget deficit projected for the next decade. Frozen spending means a spending cut in real terms as long as inflation remains high. The higher the inflation, the higher the spending cut in real terms.


But the problem is that at least 20 conservative Republicans of the House rejected Kevin McCarthy's compromise on debt ceiling, saying that spending cuts are not enough. One hardcore Republican, Dan Bishop of North Carolina, threatened to vote to oust McCarthy because he 'capitulated' to Democrats. Democrats, on the other hand, are not fully happy either as they don't want to freeze or to cut spending.  


This is what a compromise is: accepting something without being fully satisfied to avoid a self-induced world economic crisis! 


Anyway, any misstep at today's House vote could send the US yields higher and stocks lower.  


So far, there has been a widening gap between the way the stock and bond markets priced the threat of a US government default. While the US sovereign bonds cheapened across the board, and violently at the short end, stock investors were confident that a ceiling deal would be reached and weren't discouraged by the rising US yields to stop buying.  


And even the fact that the Federal Reserve's (Fed) hawkish stance has a material impact on yields' upside trajectory since the bank-stress dip, stock markets kept on climbing. Looking at how Nasdaq behaved since the bank stress rebound in yields, you could barely guess that there are rate-sensitive stocks in it. 


But the reality check is that Nasdaq stocks are rate sensitive, and cannot be rate-hike proof if the Fed continues hiking the rates. It would, however, also be a good thing for the Fed members to consider pulling some liquidity out of the market as the Fed's balance sheet is still worth more than before the bank crisis. 


What if Russia refuses to cut output? 

In energy, US crude tanked nearly 5% yesterday, and tipped a toe below the $69 pb mark on worries that Russia may not follow OPEC's output cuts, in which case the internal conflict may prevent the cartel from reducing supply in a way to give a jolt to oil prices.


There is little chance that we see the kind of discord like back in 2020, as the Ukrainian war strengthen the ties between two allies. But any Russian veto could materially reduce OPEC's power of hit on oil prices. 


Elsewhere, the Chinese manufacturing PMI showed that contraction in activity accelerated in May instead of stepping back to the expansion zone. The faster Chinese manufacturing contraction also weighs on the sentiment this morning.  


We shouldn't expect China to post growth numbers comparable to levels pre-2020 because China under Xi Jinping's rule is willing to avoid euphoric, and unhealthy growth.


This is why the government put in place severe crackdown measures on real estate, tech and education. That does not mean that China won't get back in shape, but recovery will likely take longer, and growth will likely be more reasonable and a better reflection of the reality of the field.  


Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns!  What if Russia didn't follow OPEC's output cuts?

Ipek Ozkardeskaya

Ipek Ozkardeskaya provides market analysis on FX, leading market indices, individual stocks, oil, commodities, bonds and interest rates.
She has begun her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high net worth clients. In 2012, she started as FX Strategist in Swissquote Bank. She worked as Senior Market Analyst in London Capital Group in London and in Shanghai. She returned to Swissquote Bank as Senior Analyst in 2020.
She is passionate about the interaction between the economy and financial markets. She has been observing and analyzing a wide variety of relationships between the economic fundamentals and market behaviour over the past decade. She has been privileged to live and to work in the world's most exciting financial hubs including Geneva, London and Shanghai.
She has a Bachelor's Degree in Economics and a Master's Degree in Financial Engineering and Risk Management from the University of Lausanne (HEC Lausanne), Switzerland.