Global Equities Rise on US Debt Ceiling Optimism, US Inflation Report May Show Little Easing
Last Week Review
Optimism over a resolution to the U.S. debt ceiling supported stock gains most of last week, but a halt in talks on Friday led to some late-week concern by investors. Global equities still managed a 1.2% gain last week with U.S. equities up 1.7% and non-U.S. equities gaining roughly 0.3%. U.S. interest rates rose with the two-year Treasury yield up 0.28% to 4.27% and the 10-year yield rising 0.21% to 3.67%.
Mixed Signals on U.S. Debt Ceiling
Last week’s meeting between President Joe Biden and House of Representatives leader Kevin McCarthy did not resolve the debt limit impasse but inspired some optimism. Following the meeting, Biden said that he was confident that he and McCarthy would come to an agreement. This shift to a more positive tone around the debt ceiling helped raise investor hopes that a deal will be made. But on Friday, negotiators said talks were on pause. We believe most investors still expect a deal to be made, but the late-week roadblock shows that the path to an agreement may be bumpy.
China’s Economic Recovery Underwhelming
China’s fixed assets investment, industrial production and retail sales pointed to an underwhelming economic recovery. Fixed assets investment and retail sales were below expectations while base-level effects continue to distort the overall numbers. Investors should continue to watch if its government steps in with support.
Fed Signals Little Appetite for Rate Cuts
In the lead-up to comments from Federal Reserve Chair Jerome Powell last Friday, remarks from other Fed officials suggested at least still some consideration on raising rates in June. Powell struck a more balanced tone in his remarks last Friday. We think he primarily signaled a pause in June, in line with investors’ expectations based on futures trading.
Retail Indications Mixed
Home Depot (HD) in its earnings report last week noted slower consumer spending, while Walmart (WMT) raised its forecasts on signs that consumer preferences are favoring lower priced goods. While cracks have started to appear, the consumer remains in decent shape overall and last week’s retail sales data was encouraging.
This Week Preview
U.S. Debt Ceiling in Focus
The Treasury department has estimated that it may be unable to pay all government obligations starting as early as June 1 unless Congress raises the debt ceiling. The Treasury may have to prioritize payments or risk even more severe consequences. Last week’s developments ended on a low note as political negotiations broke down, suggesting that coming to agreement could be difficult. We think financial markets are subject to ongoing volatility until an agreement is made.
Global Economic and U.S. Inflation Updates
Preliminary flash Purchasing Managers’ Index reports are scheduled for release this week for the U.S., Europe, U.K. and Japan. U.S. and Europe services are expected to expand but at a lower rate. Manufacturing is expected to be weaker. The April U.S. core Personal Consumer Expenditures Price Index is expected to be unchanged at 4.6% year-over-year from March. We think this level would offer little comfort to the Fed, which seeks to achieve a 2% target over the long run.
Fed Scheduled to Release May Meeting Minutes
On Wednesday, the Fed is scheduled to release the minutes of its May 3 meeting when it hiked its policy rate by 0.25% and hinted at a potential pause. The minutes may offer insight into the details surrounding this decision.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of May 21, 2023.
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