Markets hesitate as debt deal faces next hurdle

Dow dropped 177, decliners modestly ahead advancers  & NAZ rose 99.  The MLP index was off 2+ to 221 & the REIT index added 1 to 355.  Junk bond funds hardly budged & Treasuries saw significant buying which lowered yields (more below).  Oil sank 3 to the 69s & gold gained 13 to 1976.

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The compromise bill to raise the debt ceiling that House Rep released yesterday faces its first major test in the House Rules Committee, where 2 of the panel's 9 Reps have already signaled they will oppose bringing it to the House floor for a vote.  The Fiscal Responsibility Act is the product of a deal hammered out by House Speaker Kevin McCarthy & Pres Biden to cap federal baseline spending for 2 years in exchange for Rep votes to raise the debt ceiling beyond next year's elections & into 2025.  The bill needs to pass the GOP majority House & the Dem controlled Senate before Jun 5, when the Treasury Dept projects the US would be unlikely to have enough money to meet its debt obligations.  A bloc of conservative Republicans have publicly attacked the compromise bill, accusing McCarthy of caving in to the White House.  Several Dems, too, have panned the deal, which includes new work requirements for food stamps that many progressives said was a red line.  McCarthy wants to hold a vote on the bill tomorrow.  But before a bill can receive a vote in the full House, it must be approved by a majority of the 13-member House Rules Committee, which sets the rules of debate on the bill.  The committee is scheduled to meet today to hash out the rules of the debt ceiling vote.  The panel's makeup is heavily skewed towards the party in the majority, 9-4, a set up meant to ensure that legislation did not get held up by a few dissenters siding with the minority.  But it only takes 3 Reps to side with the 4 Dems in order to hold up the bill.  2 Reps, Chip Roy & Ralph Norman, had already said they planned to do just that.

Debt ceiling bill faces a tough path in the House as GOP opposition grows

The Biden administration is reviewing tariffs imposed on imported goods from China to determine whether some or all of the tariffs should be lifted.  Former Pres Trump imposed tariffs on thousands of Chinese goods in 2018 & 2019 in response to an investigation that found China was violating US intellectual property laws & coercing American companies into transferring sensitive technology to Chinese firms as a condition of gaining access to China's market.  The Trade Representative (USTR) is reviewing the tariffs, which were imposed under Section 301 of the Trade Act of 1974, due to a requirement in the law that requires a review to occur 4 years after tariffs are imposed.  Deputy US Trade Representative Sarah Bianchi, who oversees the USTR's engagement with Asia, said,  "We are conducting the review from an analytical perspective. We’re not base-casing any breakthrough in the trade relationship" with China as part of the review.  Bianchi didn't offer a specific timeline for the completion of the tariff review but indicated it was "reasonable" to complete it by the end of 2023.  The expiration of tariff exclusions on 352 import categories from China at the end of Sep could serve as a decision point in the tariff review process.  The duties imposed in 2018 & 2019 were valued at roughly $370B at the time.  The tariffs, which are taxes on imported products, ranged from 7.5% on some consumer goods to 25% on vehicles, industrial components, semiconductors & other electronics.  Several categories were excluded from the tariffs, including cellphones, laptop computers & videogame consoles.  The Biden administration's tariff review comes as inflation remains persistently high – although it has eased since the review began over a year ago.  Treasury Secretary Janet Yellen had said that eliminating "non-strategic" tariffs would help bring costs for certain goods down to ease the strain on consumers, whereas Trade Representative Katherine Tai contended that the tariffs give the US "significant leverage" over China.  Bianchi said that inflation-related discussions about the tariffs have eased as inflation has eased.  She also emphasized the need for the US & China to have healthy discussions even on issues where there is disagreement.

Biden admin reviewing whether to lift tariffs on imports from China

Treasury yields fell as markets reopened after being closed for Memorial Day yesterday & investors braced themselves for a vote on a debt ceiling deal ahead of the Jun 5 deadline.  The yield on the 10-year Treasury was down by almost 10 basis points to 3.723% & the 2-year Treasury was trading more than 7 basis points lower at 4.518%.  Yields & prices move in opposite directions & one basis point equals 0.01%.  Over the weekend, Pres Biden & House Speaker Kevin McCarthy reached an agreement to raise the debt ceiling.  That came after Treasury Secretary Janet Yellen said that the US would default on its debt obligations as early as Jun 5, several days later than the previous Jun 1 deadline.  A vote on the deal is expected to take place tomorrow in the Rep-controlled House of Representatives & later in the week in the Senate, which is controlled by the Dems.  But a group of Reps said they would not agree to the deal, suggesting that there was a way to go before it is approved.  However, politicians from both sides of the aisle said they expected a resolution to be found & analysts appeared positive about a deal being approved ahead of the deadline.

Treasury yields stumble as investors anticipate debt ceiling deal vote

All traders can do now is wait to find out how those guys in DC plan to handle the deal deal.  Meanwhile safe haven gold is in demand by nervous investors.

Dow Jones Industrials

 

Markets rise on hopes that a debt ceiling deal can be reached

Dow climbed 328, advancers over decliners about 5-2 & NAZ was up 277.  The MLP index remained in the 223s & the REIT index gained 3+ to the 353s.  Junk bond funds rose along with the stock market & Treasuries were flattish with keeping interest rates about even.  Oil was up 1 to the high 72s & gold inched up 1 to 1945 (more on both below).

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Moody's Investors Service expects the ongoing standoff over raising the US debt limit to be resolved in time to avoid the nation defaulting on any bills, but says a downgrade is coming if the Treasury Dept fails to make its $2B interest payment due Jun 15.  "That's a really important date for us," Moody's Senior VP William Foster said.  Even failing to make a small payment means a ding is coming, he explained, adding, "if it was missed, that's a default. We'd downgrade the rating by one notch from AAA to AA1."  The outlet noted Foster "emphasized" that the rating agency anticipates the Biden administration & Reps will reach a deal in time to avert what would be the first default in US history & Moody's still holds a stable outlook on the nation's AAA rating, for now.  Treasury Secretary Janet Yellen has warned repeatedly that default could happen as early as Jun 1, meaning just days remain for the White House & GOP lawmakers to come to an agreement on raising the debt limit in what has been a prolonged political battle between Reps, who control the House, & Pres Biden & his fellow Dems, who control the Senate.  The situation led credit ratings agency Fitch Ratings this week to place the US's AAA rating on negative watch, pointing to "increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit despite the fast-approaching x date."  Fitch also said it expects an agreement to be reached in time to avoid any missed payments, but the analysts wrote they "believe risks have risen that the debt limit will not be raised or suspended before the x-date and consequently that the gov could begin to miss payments on some of its obligations."

US could lose AAA rating if $2B interest payment isn't made by mid-June

Consumers increased their spending sharply last month & inflation accelerated, fresh data showed, as the Federal Reserve debates whether to raise interest rates in Jun & as negotiators race to meet a debt-ceiling deadline.  Consumer spending, the primary driver of economic growth, rose 0.8% in Apr, the Commerce Dept reported, boosted by higher spending on vehicles & services such as insurance & healthcare.  Apr's report came after 2 months of weaker spending, with Mar & Feb both up 0.1%.  The Fed's preferred gauge of consumer inflation, the personal-consumption expenditures price index, rose 0.4% in Apr from the prior month & 4.4% from a year earlier.  When excluding volatile food & energy costs, prices rose 0.4% in Apr from the prior month & 4.7% from a year earlier.  Economists see core inflation as a better predictor of future inflation.  Over the past 6 months, senior Fed officials have focused on prices for a subset of labor-intensive services by excluding food, energy, shelter & goods.  Officials believe that category could reveal whether wage pressures from the solid labor market are passing through to consumer prices.  That reading rose 0.4% in Apr from the prior month & increased 4.6% from a year earlier.  The Fed’s inflation target is 2%.  The Fed has increased interest rates at 10 consecutive meetings since Mar 2022 as it tries to slow investment, spending & hiring to reduce high inflation.  This report offers clues on the extent to which the central bank has more work to do to lower inflation.  The next Fed policy meeting is Jun 13-14.  US economic growth cooled in Q1.  But a solid labor market has kept unemployment low & wage growth elevated, providing fuel for consumer spending, the main driver of economic growth.  Americans increased spending at stores, restaurants and& online in Apr for the first time in 3 months.  US economic activity rose in May to its highest pace in 13 months.  But a prolonged political fight over the nation's borrowing limit threatens to push the economy into recession or, should the gov default on its debt, trigger a financial crisis.

US consumer spending jumped in April and inflation accelerated

Inflation stayed stubbornly high in Apr, potentially reinforcing the chances that interest rates could stay higher for longer, according to a gauge released today that the Federal Reserve follows closely.  The personal consumption expenditures price index (PCE), which measures a variety of goods & services & adjusts for changes in consumer behavior, rose 0.4% for the month excluding food & energy costs, higher than the 0.3% estimate.  On an annual basis, the gauge increased 4.7%, 0.1 percentage point higher than expected, the Commerce Dept reported.  Including food & energy, headline PCE also rose 0.4% & was up 4.4% from a year ago, higher than the 4.2% rate in Mar.  Despite the higher inflation rate, consumer spending held up well as personal income increased.  The report showed that spending jumped 0.8% for the month, while personal income accelerated 0.4%.  Both numbers were expected to increase 0.4%.  Price increases were spread almost evenly, with goods rising 0.3% & services up 0.4%.  Food prices fell less than 0.1% while energy prices increased 0.7%.  On an annual basis, goods prices increased 2.1% & services rose by 5.5%, a further indication that the US was tilting back toward a services-focused economy.  Food prices rose 6.9% from a year ago while energy fell 6.3%.  Both monthly PCE gains were the most since Jan

Inflation rose 0.4% in April and 4.7% from a year ago, according to key gauge for the Fed

Gold futures finished a bit higher, but still logged a 3rd straight weekly loss.  Gold's attempted recovery ahead of the weekend was dampened a bit by further evidence of still-stubborn US inflation.  Prices for the metal may decline further, closer to the psychologically-important $1900 level if the US debt deal is sealed in the immediate future.  Gold for Jun edged up pennies to settle at $1944 an ounce.  For the week, the most-active contract fell 1.9%.

Gold futures tally a third straight weekly decline

Oil futures climbed, contributing to a more than 1% weekly gain in US benchmark crude prices.  The market saw a sharp decline yesterday on expectations that OPEC+ wasn't likely to cut production at its meeting next month, but the risk of further sharp falls is being mitigated somewhat by the fact that the markets know the US gov is a buyer of oil  below $70, as it looks to refill the Strategic Petroleum Reserve.  Jul West Texas Intermediate crude rose 84¢ (1.2%) to settle at $72.67 a barrel, with prices for the front-month contract for the week.

Oil futures end higher for the session, with U.S. prices up over 1% for the week

Stocks had a very choppy week with all the excitement about raising the debt ceiling.  Dow finished down 333, not too bad considering all the drama in DC this week.

Dow Jones Industrials 

Markets climb on hopes for a debt ceiling deal

Dow advanced 351, advancers over decliners 2-1 & NAZ gained 228.  The MLP index was steady in the 223s & the REIT index added 2+ to the 352s.  Junk bond funds crawled higher & Treasuries had only limited selling, bringing slightly higher yields.  Oil went up to the 72s & gold was off 2 to 1941.

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The Treasury Dept announced that auctions for certain short-term Treasury bills will go ahead next week.  And some observers have interpreted that as a sign lawmakers may have some additional time beyond the Jun 1 deadline to finalize a deal to raise the debt limit & avert a catastrophic default.  Treasury Secretary Janet Yellen & lawmakers in Congress have been pressing to get a deal to raise the debt limit by Jun 1, which has been cited as the earliest possible date at which the Treasury may exhaust the "extraordinary measures" it has been using to pay the gov bills since the $31.4T debt limit was reached in Jan.  The Treasury's Bureau of Fiscal Management announced auctions for 3-month & 6-month Treasury bills that will be held Tues, which will formally settle Jun 1 & a $50B cash management bill that matures in Nov.  Typically, the Treasury wouldn't move ahead with the auctions unless it’s certain it has the necessary headroom under the debt ceiling.  Gennadiy Goldberg, a senior rates strategist, said the announcements "suggest that the Treasury probably has cash to settle the security. They have suggested in the past that they would not announce auctions that they did not believe they had the means to settle."  Secretary Yellen doubled down this week on the need to resolve the debt ceiling impasse as early as possible before the Treasury exhausts its extraordinary measures & emphasized that Jun 1 is the date at which funds may be running out.  "It’s highly likely that we would run out of resources to meet all the government’s obligations in early June and possibly as early as June 1," Yellen said.  "We no longer see very much likelihood that our resources will enable us to get to the middle or end of June."  Yellen added that the Treasury is trying to update Congress with more precision about the X-date when the gov can no longer pay its bills but noted, "It’s hard to be precise about exactly which day we will run out of resources."  Uncertainty around the Treasury's daily cash balances stems from day-to-day fluctuations in tax revenue collections & payments coming due.  The Treasury has been in communication with various federal agencies about larger payments that may come due in late May or Jun to help improve its forecast, but X-date forecasts from outside the gov have also warned about a heightened risk of breaching the debt limit in early Jun.

Treasury auction signals possible leeway on June 1 debt ceiling deadline

Traders are ratcheting up the odds that the Federal Reserve lifts interest rates for the 11th straight time in Jun amid ongoing signs of inflationary pressures in the US economy.  Traders are now pricing in a 52.8% chance of another qtr-percentage point increase during the Fed's Jun 13-14 meeting — a significant rise from just one day ago, when 36.4% projected another hike, according to the CME Group's FedWatch tool.  The jump came one day after minutes from the Fed's May meeting indicated that central bank officials are divided on whether additional interest rate hikes are needed to lower chronically high inflation.  "Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary," minutes from the central bank's May 2-3 meeting said.  At the same time, "some" policymakers noted that chronic inflation means "additional policy firming would likely be warranted at future meetings."  In Fed vernacular, "several" typically implies more than "some."  Despite the division over future rate hikes, officials unanimously agreed at the meeting to lift the federal funds rate for the 10th straight time to 5.00-5.25%, the highest since 2007.  Policymakers also removed a key phrase from its post-meeting statement that indicated "additional policy firming may be appropriate" at coming meetings & stressed they will rely on economic data releases for any future policy shifts.  "Participants generally expressed uncertainty about how much more policy tightening may be appropriate," the minutes said.  "Many participants focused on the need to retain optionality after this meeting."  Although inflation has eased from a peak of 9.1%, it remains about more than double the pre-pandemic average & well above the Fed's 2% target rate.  On top of that, the labor market remains uncomfortably tight, with unemployment recently falling to 3.4%, the lowest rate since 1969, despite the slew of rate increases & ongoing strains within the banking sector.

Another Fed rate hike could be in play during June meeting

Urgent talks to raise the US debt ceiling appeared to move closer to a deal, with only 6 days to go before the US faces an imminent threat of debt default.  But negotiators warned that the final phase of talks would likely be the most delicate & difficult for both sides.  “We’re at a sensitive phase, with sensitive issues that remain. Those sensitive issues are the thorniest issues that we’ve been discussing,” Rep negotiator Rep Patrick McHenry told reporters.  “Everybody’s trying to do a fine job of figuring out the finer details of this, but nothing’s done.”  “They’ve got work in the White House, we have work here in the Capitol. I don’t know about us physically being together, but there’s alignment on the set of things that we need to work on,” said McHenry.  At the White House, Pres Biden sounded a cautiously optimistic note.  “The only way to move forward is with a bipartisan agreement, and I believe we’ll come to an agreement that allows us to move forward and protects the hardworking Americans of this country,” he said.  House Speaker Kevin McCarthy said he did not know when a deal would be reached.  “We’ve already talked to the White House today, we’ll continue to work,” he said.  “They’re working on numbers, we’re working on numbers and we’ll work together.”  One influential Rep said he was optimistic about reaching a deal before the holiday weekend.  Rep Kevin Hern, who chairs the 156-member Rep Study Committee, said that he believed it was “likely” a deal would be reached by today. “We are inching closer to a deal. I think it’s some of the finer points they are working on right now,” Hern said.  “You are likely to see a deal by today.”

Debt ceiling talks enter crunch time as negotiators get closer to a deal

Traders are optimistic about those guys in DC will agree on a debt ceiling bill.  So they are buying stocks today.  What else is there to say?

Dow Jones Industrials