President Biden met with Vice President Harris and the four key legislators in party leadership positions at the White House on Tuesday afternoon to discuss the federal debt ceiling and hopefully avoid a coming potential US sovereign default. It is widely believed the federal government could fail to meet its obligations as soon as June 1st should there be no adjustment made to the current debt limit. As a distant spectator, what surprised me most about this meeting was simply how short it was.
While my inner child had allowed for images of rolled up sleeves, sweaty foreheads and the six individuals involved working well into the night, the reality was that the participants were... instead of talking to each other, talking to the press outside of the White House in what seemed like a flash. Does that mean that nothing substantive was accomplished? Not really. As long as staffers working for the negotiators really are doing most of the work.
What you and I need to know is that no deal has been reached. No deal was expected this soon. President Biden was optimistic... "There was an overwhelming consensus, I think, among the congressional leaders that defaulting on the debt is simply not an option."
Even House Speaker Kevin McCrathy, who is clearly the power player among Republicans, sounded what I think was less pessimistic than he has... "We've got a lot of work to do. It is possible to get a deal by the end of the week. It's not that difficult to get an agreement." McCarthy had come almost directly from a closed door meeting with his Republican colleagues in the House.
There are two weeks until what we think is the deadline for getting a bill passed into law. That means the bill agreed to in principle would have to pass in the House. That starts from scratch because the already passed House bill will likely not closely reflect what is finally agreed upon. Then the bill would have to pass the Senate. Bi-partisanship is necessary as our two legislative bodies are nearly split 50/50, with each party in control of one body. After that, the president's signature is necessary before the US Treasury can raise more cash in order to meet its obligations. The whole dog and pony show could take a couple of days even after a deal is struck.
For that reason, President Biden, who is off to Asia this morning, will cancel trips to Australia and Papua New Guinea on the back end of this trip in order to be back in DC sooner. As crunch time approaches, the "photo-op" crew will step aside, as White House adviser Steve Ricchetti and Budget director Shalanda Young will join Team Blue, and Rep. Garret Graves of Louisiana will join Team Red. Overnight markets are responding well to what seems to potentially be progress here.
While markets have appeared to show some overnight optimism, they showed a different temperament on Tuesday. Of the 11 S&P sector SPDR ETFs, only Technology (XLK) closed in the green (+0.11%), which is why the Nasdaq Composite gave up just 0.18% for the session. Ten sector SPDRs closed in the red with three... as the Utilities XLU, Energy XLE, and the REITs XLRE all surrendered between 2.22% and 2.67%. This put the whammy on the S&P 500 (-0.64%). Taking a look at more specialized indexes, the Dow Transports, Russell 2000, MidCap 400, and KBW Bank Index all were slapped around on Tuesday, and gave back a minimum of 1.4% each.
Nothing changed technically for the higher profile equity indexes on Tuesday, but it should be noted that breadth was poor and trading volumes... while still quite paltry, increased. Losers beat winners by about 4 to 1 at the NYSE and by a rough 9 to 4 at the Nasdaq. Advancing volume took a 37.3% share of composite Nasdaq-listed trade and just a 17.3% share of that same metric for NYSE-listings. Trading volume increased by just a smidge for stocks listed at both exchanges as well as across the constituencies of both the S&P 500 and Nasdaq Composite.
Is that meaningful? Not yet. We would need to see more of this in order to decide for ourselves that equity markets have indeed chosen a direction for themselves.
Better Than Bad
The Census Bureau published April data for Retail Sales on Tuesday morning. The bad news? Headline Retail Sales for April increased just 0.4% from March with consensus expectations up around 0.7% to 0.8%. The good news? April was the first monthly since January where the headline print showed growth over the prior month at all. Headline retail sales have now printed in a state of contraction for four of the past six months. Core Retail Sales (ex-autos) hit the tape precisely at the 0.4% monthly growth that economists were looking for. Retail Sales are now up just 1.6% from a year ago after having printed at a year over year growth of 10.4% as recently as July of 2022.
Certain key categories remain in contraction. Sales of furniture, electronics & appliances, groceries, gasoline, clothing, and fun (sporting goods, hobbies, musical instruments & books) all contracted further in April. What pushed the headline print back into growth was the sale of building materials and health & personal products, as well as sales made through e-commerce and at food service & drinking establishments.
About 45 minutes later, the Fed published April data for Industrial Production. This print showed headline month over month growth of 0.5%, which too was the first growth of any kind in this space since January. Headline Industrial Production has printed in a state of growth now for just two of the past seven months. Manufacturing Production led the report, up 1.0% m/m, which was a pleasant surprise. Mining Production also surprised to the upside at growth of 0.6%. It was Utilities Production that tumbled (-3.1% after a strong March) and kept the headline print from reaching what might have been truly stunning levels.
Capacity Utilization "improved" to 79.7%. I use quotation marks because March capacity utilization had originally hit the tape at 79.8%, but was just revised downward to 79.4%. The street was looking for 79.8% for April, so this ended up being a mild disappointment.
The Atlanta Fed revised its GDPNow model for the second quarter late Tuesday morning. The revision to growth of 2.6% (q/q, SAAR) down from 2.7% barely made a ripple after the above data points both showed April growth. Atlanta responded to Tuesday's data by decreasing the inputs for real personal consumption expenditures and real government spending while increasing the input for real gross private domestic investment. Atlanta will revise the model again later today in response to the Census Bureau's April release for Housing Starts and Building Permits.
Holy Toledo, Batman!
The Ukrainian military reported overnight Monday into Tuesday that its air defense systems had destroyed 18 incoming missiles fired by the Russian military at the capital city of Kyiv. Included among the 18, were six Kinzhal hypersonic weapons. Why this is key, is that Russian hypersonic weapons were thought to be nearly indefensible and technologically ahead of where the US is in the development of such weapons.
Ukraine had reported earlier this month that its military had shot down a Kinzhal for the first time, using a Patriot air defense battery. The US military had substantiated that claim. No word yet if Patriots were what was used on Monday night, but just imagine how incredible it is, if something as old as a Patriot (which of course has been updated), which is more than 30 year old technology and the direct descendent of President Reagan's SDI (Star Wars Defense Initiative) program, was effective in defeating the most modern missiles that a peer adversary military could put in the sky. Just Wow !!
The MIM-104 Patriot is a Raytheon Technologies (RTX) design that can be manufactured by Raytheon, Lockheed Martin (LMT) and Boeing (BA) . Early and Modern intercept missiles (PAC 1, PAC 2, and PAC 3 were all Raytheon designs. Lockheed is the primary contractor for a missile enhancement (PAC 3MSE) that adds both agility and range to the PAC 3. There is a PAAC 4 under development, which will improve even that performance by as much as 20%. The PAAC 4 SkyCeptor is a collaborative effort between Raytheon and Rafael Advanced Defense Systems, which is a state owned Israeli aerospace company.
Rage Against The Machines
OpenAI chief executive Sam Altman appeared before a Senate subcommittee panel on privacy, technology and the law on Tuesday, and practically pleaded with legislators to regulate the burgeoning development of artificial intelligence.
Altman said: "The more general ability of these models to manipulate, to persuade, to provide sort of "one on one" interactive disinformation.. given that we're going to face an election next year and these models are getting better. I think this is a significant area of concern."
Altman later added: "When Photoshop came on to the scene a long time ago, for a while people were really quite fooled by photoshopped images and then pretty quickly developed an understanding that images might be Photoshopped. This will be like that, but on steroids." Near closing, Altman stated flatly.. "I think if this technology goes wrong, it can go quite wrong."
The European Union has already agreed to restrictions on chatbots and a tougher set of rules to govern the use of AI. The time is now, DC. Going quite wrong would truly rot.
Economics (All Times Eastern)
07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.48%.
07:00 - MBA Mortgage Applications (Weekly): Last 6.3% w/w.
08:30 - Housing Starts (Apr): Expecting 1.4M, Last 1.42M SAAR.
08:30 - Building Permits (Apr): Expecting 1.43M, Last 1.43M SAAR.
10:30 - Oil Inventories (Weekly): Last +2.951M.
10:30 - Gasoline Stocks (Weekly): Last -3.168M.
13:00 - Twenty Year Bond Auction: $15B.
The Fed (All Times Eastern)
No public appearances scheduled.