Markets Calmer Last Week, US Debt Ceiling Talks Expected to Continue This Week
Last Week Review
Regional bank stocks were under pressure again last week, but investors showed less concern on the banking sector versus prior weeks. U.S. inflation and the labor market softened somewhat. Still, inflation pressures persist, economic growth headwinds remain and U.S. debt ceiling negotiations loom. Global equities declined 0.4% last week with the two-year Treasury yield up 0.07% and the 10-year yield increasing 0.03%.
Tighter Credit Conditions in U.S. and Europe
The Fed’s Senior Loan Officer Opinion Survey showed that U.S. banks tightened lending standards and plan to continue to do so throughout the year. Also, aggregate demand for loans was weak. The breadth of banks tightening standards was only modestly higher than prior to this year’s regional bank issues, but nonetheless the data was consistent with a notable tightening in U.S. credit conditions overall. Moreover, European surveys have shown a similar pullback in credit supply and demand. We expect investors and monetary policymakers to closely watch how credit tightening may weigh on economic growth.
U.S. Inflation Softens, in Line with Expectations
U.S. inflation declined in April from March by 0.1%, to 4.9% year-over-year, based on the Consumer Price Index. Core inflation, which excludes more volatile energy and food prices, also fell 0.1% to 5.5%. Investors responded somewhat positively as core services ex-shelter, an inflation component the Federal Reserve has said it is watching, eased. The inflation data may increase the likelihood that the Fed won’t hike its policy rate at its June meeting. With that said, core prices remain elevated and the pace of progress has slowed. Elsewhere, the Bank of England hiked its policy rate by 0.25% last week. Price pressures remain elevated in the U.K. and while the Bank of England expects improvement it stands ready to do more if needed.
U.S. Debt Ceiling Negotiations Start
Debt ceiling negotiations are underway including a meeting between President Joe Biden, U.S. House of Representatives Speaker Kevin McCarthy and other congressional leaders last week. Little progress was made, but we believe the desire from both parties to continue talking can be viewed as a positive against very low expectations. The probability of default may be low, but financial markets have started to price in some risk. One-month Treasury bill yields have risen as investors require a premium for the risk of default.
U.S. Earnings Tracking Better than Feared
Sales have topped estimates by about 6% and profits have exceeded estimates by about 3% in first quarter financial reports of companies in the S&P 500 Index. Nearly 80% of companies have beaten earnings estimates compared with the long-term average of 66%. More than 90% of companies have reported earnings.
This Week Preview
Key Debt Ceiling Meeting Scheduled This Week
Biden and McCarthy are scheduled to meet again this week on the debt ceiling. Any progress or lack of progress could trigger a market reaction, especially with the Treasury saying that default could occur on June 1.
U.K. Labor Market, European Inflation Reports Scheduled
U.K. labor market data is set to be released on Tuesday, which may put heat on the Bank of England if conditions are tighter than expected. On Wednesday, final Europe inflation (Consumer Price Index) is not expected to deviate much from the elevated preliminary core inflation of 5.6%. Japan’s core inflation — scheduled for Thursday — has been trending higher and is expected to accelerate again to 4.2%. Finally, a slew of data on China’s economic activity will also be released toward the beginning of this week.
Home Depot, Target and Walmart to Report Earnings
Most of this week’s focus will likely be on the state of consumer health, with several important U.S. retailers set to report. This includes Home Depot (HD) on Tuesday, Target (TGT) on Wednesday and Walmart (WMT) on Thursday. U.S. retail sales, set to be released on Tuesday, will likely offer further insight into consumer health. Excess savings have been a support, but several uncertainties could weigh on future consumer spending.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of May 14, 2023.
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