The debt ceiling crisis-du-jour has the potential of causing a financial catastrophe but may have been resolved. An agreement has been worked out “in principle” but it won’t go into effect unless passed by both houses of Congress and signed by the president. It’s not a sure thing because extremists on both sides of the aisle are unhappy so it may not get the votes to pass. If it doesn’t pass it’s back to Square One and the government will default on June 6, per Treasury Secretary Janet Yellen.
The nascent accord, reached Saturday evening by the president and the speaker, must still be ratified by both chambers of Congress, a tortuous process that will rely on centrists in both parties. McCarthy’s margin for error is small and lawmakers in his conference might still rebel, requiring negotiators to go back to the table, costing him his job or sending the country into a default that could rattle the global financial system and stain America’s creditworthy reputation. … [end quote]
If it passes, the agreement will raise the debt ceiling for 2 years so the next crisis will occur after the 2024 presidential election. That assumes that Congress will fail to do the sensible thing which would be to repeal the absurd debt ceiling entirely. (Which Janet Yellen asked Congress to do in 2022.)
The deal holds nonmilitary spending roughly flat for the 2024 fiscal year from this year, after factoring in some appropriations adjustments. The deal sets a 1% cap on spending increases for the 2025 fiscal year. The Macro impact would be to constrain inflation since fiscal stimulus goes directly into consumer pockets.
The deal doesn’t touch Social Security and Medicare, which represent 60% of government spending and are adjusted for inflation. I don’t see how spending increases can be constrained to 1% unless the deal exempts the inflationary growth in the big entitlement programs.
If not for the debt ceiling crisis, the news that core PCE inflation did not decline (4.7%) would have had top billing. The Federal Reserve has said many times that it will not reduce the fed funds rate until inflation has declined to its target of 2% and stayed there for an extended period of time. The Fed may hold the fed funds rate steady or perhaps raise it in June but certainly won’t cut. The market is giving a 2/3 probability that the Fed will raise 0.25%.
Given the debt ceiling crisis and inflation news, the stock market has held pretty steady. A few tech stocks have popped, driving the SPX and NAZ higher. The DJIA remains in the channel established in 11/2022. VIX is low. The percent of SP100 stocks above their 200 day MA is in a similar channel and similarly dropping at this time. I’m uneasy because the rising segment is very narrow and bullish percent is falling. The stocks that have risen are tech stocks with a volatile history.
The entire Treasury yield curve is rising. This will put pressure on banks which hold long-term Treasuries. Corporate bond yield spreads are somewhat elevated for both investment-grade and junk bonds, pressuring companies which will need to roll over debts from ultra-low 2020 borrowing.
The Fear & Greed Index is in Greed. The trade is risk-on as SPX and junk bonds are rising relative to Treasuries. (The price of bonds fall when yields rise.)
Gold, silver, copper, and oil are falling. The USD and natgas are rising.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2023 is 1.9 percent on May 26, down from 2.9 percent on May 17.
The Conference Board Leading Economic Index® (LEI) for theU.S. declined 0.6 percent in April 2023 to 107.5 (2016=100), following a decline of 1.2 percent in March. The LEI is down 4.4 percent over the six-month period between October 2022 and April 2023—a steeper rate of decline than its 3.8 percent contraction over the previous six months (April–October 2022). The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook and weak GDP growth ahead.
The METAR for next week is very uncertain. If Congress passes and the president signs the debt ceiling raise before June 6, the METAR will be sunny and the stock market will pop. However, this isn’t a sure thing. If they fail there could be a full-blown economic crisis.
Aside from that, the economy is slowing as the Federal Reserve intends. But this effect will be swamped by the debt ceiling crisis.