The much hyped Oval Office meeting held primarily between President Biden and Speaker of the House Kevin McCarthy (R-CA) came and went on Tuesday afternoon. Quickly and quietly. As expected. At least that's the public take. Making progress with three weeks left in May probably would have been a stunner.
The discussion around increasing the federal debt ceiling and avoiding a US default as soon as early June also included Senate Majority Leader Charles Schumer (D-NY), Senate Minority Leader Mitch McConnell (R-KY), and House Minority Leader Hakeem Jeffries (D-NY).
The short of it for those avoiding all things political is that the Republican led House has passed legislation that increases the debt ceiling, but would also force federal spending cuts. Federal spending is up 13% year over year. The Biden administration has so far, at least publicly, refused to negotiate as the official stance from Democrats seems to be that they see the debt ceiling and federal spending as two separate issues and would be willing to negotiate both. Just not with one dependent upon the other.
Put succinctly, in addressing the media shortly after the meeting's conclusion, President Biden said that he expects this to last for weeks, but that the nation would not default. The president added that negotiations should be held on "how to lower the deficit to put our fiscal house in order, but we need to take the threat of default off the table." Speaker McCarthy was even more brief... "I didn't see any new movement." Senator Schumer summed it all up for reporters... "The bottom line is very simple. There are large differences between the parties."
For those keeping score, I have seen the US 30 day T-Bill paying as much as 5.49% overnight after paying less than 4.43% this past Friday. The short-term risk of default is being priced into sovereign US debt securities.
Kick the Can Down the Road?
Both sides seem disinterested in doing something temporary or shorter-term just to avoid this default. Don't be surprised if that's exactly where we are headed.
Financial markets remained cautious on Tuesday, one day ahead of the April data for consumer level inflation expected on Wednesday morning. Wall Street is looking for month over month inflation of 0.4% at the headline and 0.3% at the core, as well as 5% year over year headline inflation while the core hums along at growth of 5.5%.
The Cleveland Fed's Nowcasting model for month over month April CPI currently stands at +0.61% headline growth and core growth of +0.46%. The model also shows year over year headline growth of +0.519% and annual core growth of 5.56%. These numbers may hurt to look at because if realized, they will not allow the FOMC to pivot though I do think a pause is almost inevitable at this point. At least Cleveland does see a cooling in the pace of consumer level inflation so far for May.
Most of our major to mid-major equity indexes stayed close to where they started on Tuesday. The exception was the Philadelphia Semiconductor Index, which was down 1.87% for the day mostly on profit taking. The Nasdaq Composite did surrender 0.63% for the session as the S&P 500 backed up 0.46%. Nine of the 11 S&P sector SPDR ETFs closed out the day in the red, though none of the 11 even moved 1%. The Industrials (XLI) led the winners, up 0.22%, while Materials (XLB) led to the downside (-0.91%).
As far as market breadth is concerned, winners did beat losers at both exchanges, by a rough 3 to 2 margin at the NYSE and about a 4 to 3 margin at the Nasdaq Market Site. However, advancing volume could only take a minority share of composite trade for names listed at both exchanges... 43.7% for NYSE-listings and 42.3% for Nasdaq-listings. Trading volume remained very thin, up small for those names listed at the Big Board and down small for those listings that call Times Square home.
US sovereign debt yields have been relatively stable from five year maturities on out to the long end. I do see the Two Year Note giving up maybe four more basis points (4.07%) than it was late last night.
Not So Peachy
Billionaire Stanley Druckenmiller is one of those talking heads whom I always pay attention to. I'll unmute the TV when I see his face. I'll read his words when they show up anywhere on the many websites that I track. Druckenmiller, who is the founder of the Duquesne Family Office, spoke at the 2023 Sohn Investment Conference on Tuesday. Now, remember, this is a smart guy who really doesn't say anything that he has not thought out.
Druckenmiller, speaking on the economy, said... "I am not predicting something worse than 2008. It's just naïve not to be open-minded to something really, really bad happening." Druckenmiller thinks that the US economy is at the edge of recession and according to Bloomberg News, is predicting a "hard landing", while acknowledging that the present is a difficult time to project economic forecasts.
Druckenmiller was not all gloom and doom. He does see "unbelievable opportunities in the next couple of years", but that investors will have to make sure that they preserve their capital for the time being. On artificial intelligence, he said "AI is very, very real and could be every bit as impactful as the internet." Let's hope so. I remain long Microsoft (MSFT) , Nvidia (NVDA) and Advanced Micro Devices (AMD) , among others.
There were a couple of Fed heads out and about on Tuesday. That has been something of a rarity these past two weeks. Fed Gov. Philip Jefferson, who is thought to be on the president's short-list for the vacant position of Vice Chair, and New York Fed Pres. John Williams both mentioned tightening lending conditions, though they do not seem to be coming at this from the same perspective.
On Tuesday morning, speaking from Atlanta, Jefferson said, "We have the data showing that banks have started to raise lending standards and that has contracted the availability of credit. That is typical for where we are in the economic cycle." Jefferson added, "I am of the view that inflation will start to come down and the economy will have the opportunity to continue to expand."
Whatever data Jefferson has gotten hold of, he apparently has not shared with Williams. Either that, or Williams just isn't seeing what he has available. That would not surprise. On Tuesday afternoon, several hours after Jefferson had mentioned having "the data", Williams said... "One of the things I'm very focused on is, how are we seeing the tightening of credit conditions. Quantifying that, in terms of how big this is compared to other episodes, is still pretty challenging because we haven't gotten a lot of real data. But clearly, it's going to have an impact."
Either you have the data or you don't, fellas. Maybe you want to coordinate a little next time you both speak publicly on the same day.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.5%.
07:00 - MBA Mortgage Applications (Weekly): Last -1.2% y/y.
08:30 - CPI (Apr): Expecting 0.4% m/m, Last 0.1% m/m.
08:30 - Core CPI (Apr): Expecting 0.3% m/m, Last 0.4% m/m.
08:30 - CPI (Apr): Expecting 5.0% y/y, Last 5.0% y/y.
08:30 - Core CPI (Apr): Expecting 5.5% y/y, Last 5.6% y/y.
10:30 - Oil Inventories (Weekly): Last -1.28M.
10:30 - Gasoline Stocks (Weekly): Last +1.743MM.
13:00 - Ten Year Note Auction.
14:00 - Federal Budget Statement (Apr): Last $-378B.
The Fed (All Times Eastern)
No public appearances scheduled.