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US politicians move closer to a debt-ceiling deal, Citigroup pivots on US stocks, and a rare partnership is struck by Ford and Tesla. — Liza [View in browser]( [Bloomberg]( US politicians move closer to a debt-ceiling deal, Citigroup pivots on US stocks, and a rare partnership is struck by Ford and Tesla. — [Liza Tetley]( Talks progress [Republicans and White House negotiators are moving closer to an agreement to raise the debt ceiling]( and cap spending for two years, with just a week to go before the US Treasury potentially runs out of cash. The two sides haven’t yet agreed on the amount of the cap, but it is looking like defense spending would be permitted to rise 3% next year and the agreement could include a measure to upgrade the nation’s electric grid to accommodate renewable energy. [House speaker Kevin McCarthy has vowed to work through the long weekend to thrash out a deal](. Citi upgrades [Citigroup strategists have raised their rating on US stocks to neutral, and are overweight on tech shares amid AI optimism](. The country’s exposure to tech mega-caps should help US equities outperform other stock markets once the Federal Reserve completes its tightening cycle, the strategists said. Their more favorable pivot is also premised on resilient economic growth in the US, compared to China and Europe. Citi strategists had cut US stocks to underweight in early December on recession fears, but they now see a US recession starting only in the fourth quarter. Auto partners [Elon Musk has been hosting more Twitter spaces sessions with notable individuals, most recently Ford CEO Jim Farley]( to announce an auto-industry partnership. Ford has struck a rare deal with Tesla to give its electric vehicle customers access to the latter’s supercharger network, becoming the first major automaker to do so. A range of Ford vehicles will be able to power up on 12,000 Superchargers across North America starting next year using an adapter, and the company’s next generation vehicles starting in 2025, will have the Tesla charging capability built in. Muted markets Contracts on the tech heavy Nasdaq are continuing their advance, gaining 0.3% as at 6:55 a.m. in New York, thanks to continued optimism around Nvidia and AI prospects. S&P 500 futures are also rising, up 0.2%. Treasury yields are falling, most markedly at the short end, on debt ceiling optimism, while a measure of the dollar is weakening. Oil prices are set for a weekly gain, climbing higher today. Gold prices are edging higher but still set for their third weekly decline. Coming up… It’s a light day on the data front, with US April PCE figures, wholesale inventories and durable goods data out at 8:30 a.m. Then we’ll get the University of Michigan Sentiment for May at 10:00 a.m. And lastly the Baker Hughes US rig count is at 1:00 p.m. The House is on Memorial Day recess through June 5. Will S&P 500 rally or slide? How long before the index climbs back to its 2022 peak? Will value stocks will outperform growth? Or, maybe, it's time to look past stocks and into alternatives? Share your views in our latest [MLIV Pulse survey](. What we’ve been reading Here’s what caught our eye over the past 24 hours: - [Morgan Stanley is making senior job cuts]( as part of Asia downsing - [Elon Musk’s brain implant company says it has approval to conduct human trials]( - [Imran Khan is looking vulnerable as Pakistan’s military cracks down]( - [Deaths from Covid-19 in Singapore surged](last month even as infections fall - [JPMorgan axes around 1,000 First Republic Bank employees]( in takeover - [UK retail sales bounced back in April thanks to better weather]( - [Ron DeSantis’s campaign said it raised $8.2 million in the first 24 hours](bbg://news/stories/RV8SWBTVI5MO) And finally, here’s what Ed’s interested in this morning... One of the biggest question marks in bond markets now is when, why, and how much policy makers will eventually cut rates, now that we’re nearing the end of the tightening cycle. Two weeks ago, markets were preparing for multiple easings this year, but those hopes are fading as the economy shows signs of still being hot. There might even be at least one more hike ahead. [US bonds maturing in 2024 and 2025 have the most risk from a shift upward in expectations for future yields.](bbg://news/stories/RUV0YLT0G1KW) - Data released this week show the US doing better on employment and growth, while inflation is also marginally higher. At the margin, that increases the likelihood for a longer pause and even a rate hike down the line. - Fedspeak is universally hawkish right now as a result. I would characterize the communication as suggestive of a hawkish pause. With the rate hike train nearing its end, discord is now greatest among Fed officials about the best policy path forward. The easiest way to get hawks and doves rowing together, now that the real Fed funds rate is positive and inflation is receding, is to switch from hikes to a pause. That would kick the can down the road, and allow for data to steer the Fed to a clearer consensus. - The market has been taking this on board, with Fed fund futures now pricing in less than 1 1/2 cumulative quarter percentage point cuts by January 2024. A week ago, that level was 2 1/2 and two weeks ago, it was nearly 4. - But rate cut expectations remain. You can see the rate cut expectations in the divergence in price action between the Sep 2023 and the Jun 2024 Fed funds futures contracts. Starting about November 2022, speculation on Fed rate cuts caused the Jun 2024 to rise in price while the Sep 2023 contract remained in a tight range, except during the regional bank turmoil. The September 2023 contract is now back to the same level in November as when the rate cut hopes first began. - The Jun 2024 contract, on the other hand, is very elevated by comparison. That’s based on two common assumptions. The first is that the US economy will be in recession by then. The second is that the Fed will cut in response. But there are reasons to doubt both of these expectations, in particular expectations for more easing. - First, while the bar is high for another hike, it is also high for a cut, at least in the medium-term. We will see that in the summary of the Fed’s economic projections in June. I expect the 2023 year-end Fed funds rate to remain the same but for the 2024 rate to perhaps go a bit higher based on an upgraded 2023 outlook for employment and GDP growth. - That makes near-term Fed fund futures pricing look realistic. But Fed fund futures still pricing in 1 1/2 cuts by Jan 2024 look unrealistic, setting us up for additional losses for the Jun 2024 as the market is forced to price out those cuts. - The losses are even more likely when you consider that we’d have to have a big recession in 2023 to crystallize cuts by Jan 2024. The Fed has penciled in a rise in unemployment to 4.5% by year-end without a rate cut. So even if we have a mild recession in 2023, no rate cuts are coming. And perhaps, we won’t see easing until the unemployment rate rises to 5%. - On the Treasury curve, this translates into the greatest losses in the 12-month maturity and the year thereafter as the market prices out cuts in 2023. Any longer-term rates are mostly a reflection of expected inflation, which has not become unanchored. - The 1- and 2-year part of the curve is where market expectations are most out of whack with likely rate outcomes. The pain points for the market will be there. - NOTE: Ed Harrison writes for Bloomberg’s Markets Live team. The observations he makes are his own and not intended as investment advice. For more commentary, see the MLIV blog Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. 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