Good Morning, It’s Alex Kagin here. Today I’m running through the most important things happening in the market this week and what we can look forward to now with a signed agreement to raise the debt ceiling. And in case you missed it over the weekend, OPEC+ agreed to some pretty big cuts. Saudi Arabia will make an additional voluntary cut of 1 million barrels of oil per day (bpd); last time we saw major cuts, oil prices made a big jump.
Data in the week ahead could also give a much clearer picture about whether to expect a rate hike.., or a pause. May’s surprise nonfarm payroll data probably didn’t do much to change the Fed’s view about pausing, given the lagging data, but with ISM services data and initial jobless claims coming in this week, and unlikely to show weakness, we could see more Fed officials positioning for a hike. Last week we saw several Fed Presidents including Jim Bullard, Michelle Bowman and Loretta Mester all speak in favor of a hike. Two of those presidents are voting members in the upcoming meeting.
Moving on From the Debt Ceiling: Oil and Treasuries on Sale
The debt ceiling boost has been signed into law as of this weekend, and now the U.S. Treasury is set to unleash a tsunami of new bonds to refill its dwindling cash account. There's not a lot of agreement among economists on what this will mean for liquidity - there are bulls and bears - and I'm personally seeing potential for a negative impact on stocks; the new issues will likely compound the effects of quantitative tightening on stocks and bonds.
Now, we’re not talking about a paltry few billions of dollars being sucked out of markets - some Wall Street estimates go as high as $1 trillion over the next quarter. Today’s auctions alone are set to total more than $170 billion. What I believe we'll see are money-market funds, households, and pension funds lining up to buy. This is bad news for banks as that money shifts out of deposits, a key for banks ability to lend and grow. Then again, what choice to depositors have, given the low yield in most bank accounts?
On top of that, oil prices are also headed higher on the back of the OPEC+ meeting this weekend, and that aforementioned 1 million bpd cut from the Saudis, which could be extended through 2024.
These two events, along with the fact that the S&P 500 would actually be down this year (instead of up 12%) if it wasn’t for a select few mega-cap technology companies really says something about the poor breadth of this market. While it’s not uncommon for the largest companies to drive the market, the spread is at a historical high and weekly net bets against the S&P 500 from hedge funds and speculative investors is at its most bearish since 2007 according to Commodity Futures Trading Commission (CFTC) data.
We are in a fragile market, and any major data point, or Fed decision to hike could quickly break it.
Economic Highlights
Monday: May’s ISM Services gauge could signal continued demand for a variety of services. Consensus is 52.5 versus a prior 51.9 and with the latest Beige Book pointing to steady consumer spending with demand for some services rising, this upward trajectory looks likely.
Thursday: Jobless claims have stayed relatively flat over the past two months following major layoffs across the tech sector. Barring any major surprise one way or another, forecasts are only showing a slight uptick from last month, giving more reason for the Fed to hike at its next meeting.
Earnings to watch:
While earnings have generally surprise to the upside this quarter, helping investors put money into the stock market at record rates, that could be slowing down as investors push back on how much artificial intelligence will impact stocks across every sector.
Tuesday and Wednesday, we’ll see J M Smucker Co. (SJM) and Campbell Soup Co. (CPB) report earnings. These packaged goods companies also give a good gauge on how manufacturers are dealing with higher costs and ability to raise prices. On Thursday Vail Resorts Inc. (MTN) reports, and they could be on track to show record sales given an extended ski season based on favorable weather. This would also be in line with consumers spending more on services.
We will also see tech companies like Docusign Inc. (DOCU) and GitLab Inc. (GTLB) report this week. For folks looking for a short, Stitch Fix Inc. (SFIX) is projected to post a 21% drop in quarterly revenue, the fourth double-digit decline in a row.