Top 5 things to watch in markets in the week ahead

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Investing.com -- With a tentative agreement in place to raise the U.S. debt ceiling investors will be turning their attention to the Federal Reserve's plan for interest rates. Friday's U.S. jobs report will be closely watched - a strong number would fuel expectations for another rate hike in June. Elsewhere, PMI data out of China is expected to add to the view that the recovery in the world's second-largest economy is faltering, while Eurozone inflation data is likely to add to pressure on the European Central Bank.

1. Debt ceiling deal

Democratic President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal late Saturday to raise the ceiling on U.S. government borrowing and avert a default that threatened to send shockwaves through the global economy.

But the deal still faces a difficult path to pass through the narrowly divided Congress before the government runs out of money to pay its debts, which the Treasury warned Friday will happen by June 5.

The long standoff on raising the debt ceiling has spooked financial markets, weighing on equities and forcing the United States to pay record-high interest rates in some bond sales, but for the most part investors had been expecting Washington to reach a deal, meaning a sustained rally in stock markets may be unlikely.

2. U.S. jobs report

Economists are expecting Friday’s nonfarm payrolls report to show that the U.S. economy added 180,000 jobs in May. In April, U.S. job growth accelerated to add 253,000 with wage gains increasing solidly.

The jobs report will be one of the last pieces of data before the Fed’s June meeting. At its May meeting, the U.S. central bank signaled it was open to pausing its aggressive 14-month rate hiking campaign in June.

But since then, some Fed policymakers have said inflation does not appear to be cooling fast enough, a view that was bolstered by data on Friday showing that underlying core inflation jumped 4.7% in April, well above the Fed’s 2% target.

Markets are now pricing in a roughly 64% chance that the Fed raises rates by another 25 basis points at its June 14 meeting, according to Investing.com’s Fed rate monitor tool.

3. Stock markets

U.S. stocks finished sharply higher on Friday ahead of the long weekend, with the U.S. stock market closed on Monday for the Memorial Day holiday.

Markets were boosted by hopes for a deal on the debt ceiling and a second day of strong gains in chip stocks amid optimism about artificial intelligence.

Some analysts said a deal on the debt ceiling getting done may give more reason for the Fed to feel confident about raising rates again.

Investors will be watching appearances from Fed officials during the week with Richmond Fed President Thomas Barkin and Philadelphia Fed President Patrick Harker, along with board member Philip Jefferson scheduled to speak.

4. China PMIs

China is to release official PMI data on Wednesday, followed a day later by the private sector Caixin manufacturing PMI. The contraction in the manufacturing sector is expected to moderate slightly, while the rate of expansion in the stronger service sector is expected to slow.

This would chime with recent economic data which has pointed to a loss of momentum in the world’s number two economy amid weakening demand both at home and in the country’s major export markets.

Beijing has set a modest growth target of around 5% for this year. Earlier this month, Premier Li Qiang vowed more targeted measures to expand domestic demand and stabilize external demand in an effort to promote a sustained economic rebound.

5. Eurozone inflation

The Eurozone is to release flash consumer price inflation data for May on Thursday which is expected to underline that the European Central Bank still has a long way to go in its battle to curb price pressures.

Headline inflation is currently running at 7% on a year-over-year basis while underlying annual inflation is currently 5.4%, both well above the ECB’s 2% target.

At its most recent meeting earlier this month, the ECB reiterated that it was very much in rate-hiking mode, saying "more ground" needs to be covered to tame inflation.

Data last Thursday showed that Germany, the bloc’s largest economy, entered a recession in the first quarter as high inflation hit consumer spending.

--Reuters contributed to this report