Making sense of current global financial conditions

<p>Kia ora,</p><p>Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the international edition from Interest.co.nz.</p><p>And today we lead with news we may be having <a href="https://www.investopedia.com/terms/b/bear-market-rally.asp" target="_blank"><strong>a bear market rally</strong></a> in financial markets, always a very risky time even if the data doesn't shout risk warnings. (In the past, such events have ended with a panic selling period.) But of course every new event isn't the same as prior ones and this time we have strong labour markets and resilient households which were never present in similar prior periods.</p><p>But first, today is a holiday in the US, their Memorial Day. That will be a key reason financial markets will remain quiet today.</p><p>The Biden-McCarthy debt limit deal is heading for votes in Congress. The Senate is likely to approve. But the House vote will be more contentious, and that will likely take place on Thursday NZT. After that, attention will turn to financial markets as the US Treasury races to sell bonds to replenish their reserves. That amount will be huge but needs to be completed by June 5 (Saturday NZT) to avoid default. This rush will likely be destabilising in bond markets, although the Fed may have to step in with its balance sheet support to ease the strains on financial stability.</p><p><a href="https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-Members-20230526-McCarthy.pdf" target="_blank"><strong>Yellen has told McCarthy</strong></a> that "We will make more than US$130 bln of scheduled payments in the first two days of June, including payments to veterans and Social Security and Medicare recipients. These payments will leave Treasury with an extremely low level of resources. During the week of June 5, Treasury is scheduled to make an estimated US$92 bln of payments and transfers, including a regularly scheduled quarterly adjustment that wo