Debt-Ceiling Deal, Consumer Spending and the Fed

Debt-Ceiling Deal, Consumer Spending and the Fed

The debt-ceiling negotiations are front of mind for most people (that... and probably AI stocks), but don’t expect too much of a reaction to the debt-ceiling agreement. Equities already rallied hard last week, meaning much of the good news is baked into prices, and expectations of another Federal Reserve interest rate hike should further dampen upside.

We should see equities climb at the open this morning, particularly U.S. stock futures, but there’s a strong argument that equities will fade on the debt-ceiling resolution; the deal will expose stocks to a correction as the resulting increase in Treasury issuance sucks liquidity from the system.

Net issuance in both T-bills and bonds have dwindled to almost zero as the debt limit approaches; the Treasury General Account (TGA) will need to be funded. According to a recent Treasury report, it will refill the TGA to $550 billion by the end of June (the account is at less than $50 billion at the moment), which means bank deposits could keep falling as liquidity is absorbed.

A deal also means resuming student loan repayments in roughly two months, which is likely to have a significant negative impact on consumer spending after six pauses.

The debt ceiling is on the FOMC members’ minds as well given the possibility that US sovereign debt could be downgraded, brining back memories of the 2011 standoff and market conditions that brought broader markets down roughly 20%. The labor market is continuing to to show signs of cooling, though it’s happening too slowly to put the Fed at ease. Most of the cooling has come from a decline in excess demand (i.e. the Job Openings and Labor Turnover Survey [JOLTS]) and the most recent inflation and spending data have given the Fed all the more reason to hike in June.

Oil Tensions Are on the Rise

Russia keeps pumping cheaper crude into the market, and other producers don't like it a bit. Saudi Arabia has complained that Moscow is undermining efforts to bolster prices by failing to fully implement promised output cuts. While friction between the two isn’t new to OPEC+, it may add strain to the next meeting on June 4th, where productions cuts will be a big talking point. Oil likely to stay in range ahead of the meeting.

China and Chips

Commerce Secretary Gina Raimondo said the U.S. “won’t tolerate” the recent decision by Chinese authorities to ban chips by Micron Technology Inc. (MU) in some critical sectors. This is going a big deal as many major American semiconductor companies heavily relay on China. Qualcomm Inc. (QCOM) derives 64% of its revenue from China, Broadcom Inc. (AVGO) gets 35%, and Intel Corp. (INTC) draws 27% of its revenue there. This is likely why we saw Apple Inc. (AAPL) make such a big move last week partnering with Broadcom on 5G chips, to reduce its reliance on China.

Week Ahead: Key Economic Data and Earnings

After the Memorial Day holiday, we start the week off with Tuesday’s consumer confidence numbers. With University of Michigan’s sentiment measure already headed lower and personal-income also hinting at a deterioration of households’ ability to sustain spending, it will be likely we see the same once again given higher prices weighing in on consumer views.

Wednesday is a big day with JOLTS data and the Federal Reserve Beige Book. This report will signal whether the economy and the labor market continue to soften gradually or whether a more drastic slowdown is underway. Thursday will also see releases of initial jobless claims, construction spending, ISM manufacturing, and Friday we get the monthly employment report

Earnings have slowed down quite a bit, but there are plenty of big names set to report.

Tuesday: HP Inc. (HPQ), U-Haul Holding Co. (UHAL), Box Inc. (BOX)

Wednesday: Salesforce Inc. (CRM), Crowdstrike Holdings Inc. (CRWD), Veeva Systems Inc. (VEEV), C3.ai Inc. (AI)

Thursday: Broadcom Inc. (AVGO), Dollar General Corp. (DG), Lululemon Athletica Inc. (LULU), Dell Technologies Inc. (DELL)