Domestic equity markets literally went almost nowhere on Tuesday after at least large tech, and especially those names more focused upon the development of generative artificial intelligence had charged ahead early in the regular session. There was plenty of equity churn however, as trading volumes increased across these markets. The real action was in US Treasuries where prices moved ahead, forcing yields lower, and in currency markets where capital moved back into the US dollar.
The caution was centered around a House Rules Committee vote that ultimately, by a narrow 7-6 margin decided to move the perhaps inappropriately named "Fiscal Responsibility Act" on to the full House for a vote on passage later today (Wednesday).
If passed through both houses of the US legislature and signed into law by President Biden, this bill would suspend the debt ceiling through January 1,2025, while capping the trajectory of spending growth over the next two years. This places the next budget battle after the 2024 presidential election, but ahead of the resultant inauguration day. Oh joy.
White House economists have been informing legislators that this bill would reduce planned spending by $1T over 10 years, while Republican economists have intimated that it was more like $2T. The bi-partisan CBO (Congressional Budget Office) had to come out on Tuesday with an estimate that the bill would reduce federal deficits by a rough $1.5T from where they would have been in 10 years.
This is just one man's opinion, but I see this bill, though it has to pass at this point, because a sovereign default has to to be avoided, as a band-aid on a wound that has not been sanitized. The bill solves the bleeding (short-term) problem, but fails to work towards preventing or curing the infection (longer-term issues).
What we have here is runaway federal debt. In terms of solving that issue, this bill only slows the growth of said debt, while doing nothing to reduce it. This will barely ding the current trajectory of that burgeoning problem. The fiscal hawks can not be happy with this deal. Now, on the other hand, those most responsible for the irresponsible spending over the past 25 years, but especially the last two of three, can not be happy as even with all of that loose fiscal policy, the US economy struggles to grow and has visibly slowed.
This slowing of what is still habitual deficit spending, while not enough to improve the debt picture, could be enough to tip a teetering economy into outright sustained economic contraction. That's what we call a hard landing economic recession in my neck of the woods.
There are 435 elected representatives, or voting members of the House. Of those, 222 are Republicans and 213 are Democrats. 218 votes are needed to move the bill over to the Senate, where the Democratic caucus holds a slim advantage. So far, 17 of these 222 Republicans have openly stated their objection to this bill primarily because it does not actually cut spending.
Several of these Republicans, including Scott Perry of Pennsylvania, stand in favor of the partisan "Limit, Save and Grow Act" that the House initially passed weeks ago as an opening bid in the negotiations with the Biden administration that ultimately produced the "Fiscal Responsibility Act."
Perry chairs the House Freedom Caucus. Several members of that caucus are threatening to invoke a "motion to vacate" the speakership or at least vote on confidence in Speaker McCarthy. The fact is that there are several items in this bill that more extreme Democrats do not like either, such as a requirement to extend work requirements in order to qualify for food stamps from age 49 to age 54 and a suite of changes that will expedite energy and infrastructure projects in such a way that limits federal scrutiny.
However, if there really are only 17 Republicans that hold out against this bill, it won't need all that much help from Democrats to pass, and a majority of Democratic representatives are expected to vote in favor. In the end, this bill passes and probably passes almost easily.
Chutes and Ladders
WTI Crude for July delivery gave up the $70 per barrel level on Tuesday, and I see those futures trading with a $68 handle through the zero-dark hours on Wednesday morning. This drop in market prices for crude comes days ahead of this Sunday's OPEC+ meetings.
The issue for OPEC+ is the obvious tension between the Saudis who lead the actual OPEC cartel and would like to cut production from current levels in order to prop up prices, and the Russians who lead the non-cartel members of the larger group and need to keep pumping oil at deeply discounted prices in order to maintain the flow of revenue supporting their ongoing war effort inside of Ukraine while also trying to protect the Russian economy from outright collapse.
That Thud You Heard...
... was the global economy. Asian equity markets hit the skids on Wednesday morning in response to CLFP Chinese Manufacturing PMI for May that hit the tape at a disappointing 48.8. This was a second consecutive month of contraction for the Chinese manufacturing sector after three months of expansion, and suggests that the manufacturer to the world is seeing an uneven recovery as it comes out of the long winter that was its "Zero-Covid" policy.
The Chinese Non-Manufacturing PMI managed to print in a state of expansion, but below expectations and showed some deceleration for a second straight month. The Caixin or non-government run Chinese manufacturing PMI for May is expected to print this evening. That measure of manufacturing activity within China has hit the tape in a state of contraction in seven of the past nine months.
Wall Street was more active than some might have thought coming out of a long weekend and with the new debt ceiling deal still being debated at the time at the House committee level. The mid-major and major equity indexes mostly went nowhere. As the Nasdaq Composite posted a gain of 0.32% on Tuesday, the S&P 500 closed virtually unchanged. The small to midcap indexes all gave up less than half of one percent for the session as the Dow Transports gained less than half of one percent.
Losers beat winners by a rough 6 to 5 at the Nasdaq and by less than 8 to 7 at the NYSE. Advancing volume took just a 44.1% share of composite NYSE-listed trade and a more impressive 60.8% share of composite Nasdaq-listed trading volume. Interestingly, despite a general lack of direction, trading volume in the aggregate across names domiciled at the NYSE increased 13.8% on a daily basis over Friday, while that composite trading volume showed a 9.2% increase for Nasdaq-listings.
Just four of the S&P sector SPDR ETFs shaded green for the Tuesday session, with no single sector SPDR gaining more than 0.67% on the day. On the other end of the spectrum, both Staples (XLP) and Energy (XLE) gave up more than 1% for the day. There was no clear out or underperformance across growth, cyclical or defensive sector types.
That Was Fun
Readers will notice that many of our AI (artificial Intelligence) runners of the past few days, slowed on Tuesday and were actually trading in the red Wednesday morning ahead of the US market open. Yes, even Nvidia (NVDA) is seeing a bit of early profit taking this morning.
It appears that HP Inc (HPQ) may have reported earnings just a day or so too late to enjoy that run. On Tuesday evening, HP Inc published fiscal second quarter earnings that showed a slowdown in sales (-21.7% y/y) that missed estimates and fell to the lowest levels since the start of the pandemic. Yes, we knew that there has been broad weakness across the PC space and this is reflective of that.
However, the firm laid out a plan involving the use of AI going forward. Nothing from the pajama traders. Despite the mention of AI, the stock still sold off overnight. What HPQ is doing actually sounds interesting. The firm is working on putting together for consumers and businesses a "new PC architecture" that will run AI workloads independent of any cloud usage or storage. The firm believes that running AI locally (on premise) will reduce latency while improving on security as there would be no third party involvement. The firm expects to have PCs with a built in AI program available by 2024.
For what it's worth, the guidance provided for both the current quarter and for the full year, were not bad. In fact, the firm took full year adjusted EPS expectations at the midpoint above Wall Street's consensus. That said, even with positive cash flows, the balance sheet says that this stock trades at nine times forward looking earnings despite yielding 3.35% for good reason. I'm staying away.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.369%.
07:00 - MBA Mortgage Applications (Weekly): Last -4.6% w/w.
08:55 - Redbook (Weekly): Last 1.5% y/y.
09:45 - Chicago PMI (May): Expecting 47.1, Last 48.6.
10:00 - JOLTs Job Openings (Apr): Last 9.59M.
10:00 - JOLTs Job Quits (Apr): Last 3.851M.
16:30 - API Oil Inventories (Weekly): Last -6.799M.
The Fed (All Times Eastern)
08:50 - Speaker: Reserve Board Gov. Michele Bowman.
12:30 - Speaker: Philadelphia Fed Pres. Patrick Harker.
13:30 - Speaker: Reserve Board Gov. Philip Jefferson.
14:00 - Beige Book.