Debt Ceiling Debate Continues: The X-date of June 1 approaches, leaving the government with limited funds to pay its bills. Despite this, Wall Street remains optimistic that a deal will be made to avoid default. A report from Reuters indicates progress has been made between congressional leaders and President Joe Biden, with stakeholders needing to agree on just $70 billion in spending. However, the deal still needs to pass Congress. The market may experience volatility due to the debt ceiling uncertainty, causing some investors to reduce their trading sizes.
Inflation News: This morning’s main economic news is related to inflation. The April Personal Consumption Expenditures (PCE) prices report shows a 0.4% increase, which is slightly higher than the 0.3% that analysts predicted. Core PCE prices, which exclude food and energy, also rose by 0.4%. The release of this data caused major stock indexes and bonds to fall slightly.
- The yield on the 10-year Treasury note fell 2 basis points to 3.79% in the morning, but rose to 3.83% after the release of the PCE data.
- The U.S. Dollar Index ($DXY) slipped to 103.91.
- The Cboe Volatility Index (VIX) futures are lower at 18.76.
- West Texas Intermediate (WTI) crude oil prices rose slightly to $72.48 per barrel.
The PCE prices report is closely watched by the Federal Reserve and could indicate that inflation remains higher than expected, possibly fueling concerns over additional rate hikes in the coming Federal Open Market Committee (FOMC) meetings. Core PCE has increased by 4.7% year-over-year and has stayed at 0.3% or higher for each month of the first four months of 2023, with no sign of decline. Despite many retailers claiming that consumers are cautious and avoiding discretionary purchases, the April Personal Spending rose 0.8%, higher than the expected 0.4%.
Stocks in the Spotlight:
The PHLX semiconductor index (SOX) had its strongest single day since February after Nvidia’s (NASDAQ:) earnings led to excitement over artificial intelligence (AI), making yesterday “chip day” on Wall Street. Nvidia is approaching $1 trillion in market capitalization, a territory previously held only by a handful of stocks including Microsoft (NASDAQ:), Apple (NASDAQ:), and Alphabet (NASDAQ:). If looking to invest in the semiconductor business, investors should understand the risk factors associated with this trade, especially with current valuations remaining elevated.
Eye on the Fed:
According to the CME FedWatch tool, the chances of a Fed pause at the June meeting are at 59%, slightly lower than the previous day’s estimate. The PCE inflation data released on the day caused no significant disturbance in the market.
What to Watch:
Coming up is the final University of Michigan Consumer Sentiment figure for May and the May Job Openings and Labor Turnover Survey report for May. After Monday’s holiday, there are a couple of data points next week, notably the May ISM Manufacturing Index, Thursday’s report has shown production levels struggling for months.
Recession Watch: Almost every large U.S. retailer reporting earnings the last two weeks says consumers are cautious and shying away from large discretionary purchases. This could mean that a “stealth” recession is already in place. The May ISM Manufacturing Index should help provide more clarity. Another recession indicator to watch is the Fed’s coming Beige Book release, delivering ground-level observations of regional Fed economists.