To The Moon

On a macro level, there were two major events in the past week that gave investors further confidence. Firstly, the market believes that the Fed will pause its rate hikes in June and has received corresponding information from FOMC members. Powell's dovish stance is based on credit tightening caused by the banking crisis, which has to some extent already had a contractionary effect, thus supporting expectations of lower peak interest rates than previously anticipated. As a result, the market reacted strongly with US bond yields rising and USD exchange rates strengthening. However, pausing rate hikes in June does not mean they will stop altogether as other officials have expressed support for continuing them. Atlanta Fed President Bostic stated that inflation may be more sticky than what markets believe; unemployment is at its lowest level in over 50 years; and the economy is very strong. The Fed may lean towards further rate hikes rather than cuts after pausing in June and it is expected that there won't be any cuts this year. New York Fed President Williams also spoke before Powell's speech stating that "the pandemic did not change our model estimates of neutral interest rates." Cleveland Fed President Mester said: "Given how stubborn inflation has been running below target for so long now...I don’t think I see an equal probability of moving up versus down next." Dallas Fed President Kaplan added that current economic data doesn't rule out continued rate hikes at their next meeting as he believes there's still a long way to go before inflation returns to target levels. This means that current market pricing may be overly optimistic and if May CPI data (especially core CPI) continues to show strong stickiness then the possibility of further rate hikes remains open. Secondly, the market believes debt ceiling issues are just political wrangling between both parties and will ultimately be resolved. The US government faces X day for raising its debt limit and must reach an agreement by June 1st. However, negotiations were paused last week due to Biden's attendance at the G7 summit. After returning from the summit, Biden will continue negotiations. Once the debt ceiling crisis is resolved, the US Treasury will resume issuing bonds exceeding trillions of dollars to replenish its cash reserves (TGA) account. Therefore, market liquidity may once again be occupied by subsequent issuances of government bonds. At the same time, America's budget has greatly improved in low-interest rate times which allows it to manufacture inflation while ensuring low financing rates and promoting GDP growth and federal tax revenue. However, this positive trajectory is rapidly deteriorating due to rising interest rates, inflation returning to more normal levels and economic slowdowns. The percentage of government bond interest payments as a share of GDP has reached levels not seen since the early 2000s dot-com bubble.