Deal Time: Debt Ceiling Agreement Still Faces Challenge In Congress But Market Appears To Welcome News

(Tuesday market open) Stocks continued their winning ways early Tuesday, and Treasury yields dropped sharply after President Joe Biden and House Speaker Kevin McCarthy reached a debt ceiling deal over the weekend. Now it’s up to Congress.

A deal is a first step, and we may not know the outcome until as late as next weekend. It’s not certain that shelving this debate for two years, as the current deal envisions, would ultimately help or hurt Wall Street, either. The deal proposes less aggressive government spending growth, which could mean slower economic growth.

However, slower growth might help the Fed as it tries to stuff the inflation genie back in its bottle. JP MorganChase (JPM) said last week that a debt ceiling bill reducing government spending could do some of the Fed’s work for it, acting as the equivalent of a small rate hike.

Treasury Secretary Janet Yellen says that June 5 is likely the day the government will run out of money to pay its bills, giving legislators a little more padding to get things done. The previous deadline was June 1.

If it weren’t for the drama in Washington, D.C., this week likely would be all about the countdown to Friday’s May Nonfarm Payrolls report and what it might telegraph for next month’s Federal Reserve meeting and rate decision. Last Friday’s robust inflation and personal spending data have many market participants rethinking their expectations for a Federal Reserve rate pause in June.

The S&P 500® index (SPX) closed above 4,200 Friday for the first time since last August 19. The Nasdaq 100 (NDX) is up five straight weeks. With info tech carrying so much of the recent rally on its back and again on the upward path in premarket trading, this might be a good time to consider checking your portfolio and seeing if it might need rebalancing. The tech rally might have you more exposed to that sector than you’d planned.

Morning rush

• The 10-year Treasury note yield (TNX) is sharply lower, down 10 basis points at 3.71%.
• The U.S. Dollar Index ($DXY) is down slightly at 103.96, but still near recent two-month highs.
• The Cboe Volatility Index® (VIX) futures dropped to 17.07 after topping 20 last week.
• WTI Crude Oil (/CL) slipped to $71.96 per barrel after surpassing $74 last week. 

Stocks in the Spotlight

Earnings showcase: Despite the short week, we have a few earnings on deck between now and the weekend. HP (HPQ) and Hewlett-Packard Enterprise (HPE) kick things off after today’s close. Between the two, investors will get a decent view at a variety of tech-related enterprises, including personal computers, printers, 3D printing, networking, servers, and storage. Hewlett-Packard Enterprise also has exposure to the artificial intelligence (AI) segment, which served Nvidia (NVDA) so well when it reported last week.

The two companies, which were one until 2015, diverged in terms of earnings last time out, with HP posting mixed results in a slumping PC market while Hewlett-Packard Enterprise cheered investors with better guidance.

Tech earnings roll along from there with Salesforce (CRM) on Wednesday and Broadcom (AVGO) on Thursday. Also in the mix this week are Chewy (CHWY), Dollar General (DG), and lululemon (LULU).

Speaking of tech, Nvidia is brushing up against the $1 trillion market capitalization point, up another 4% this morning. Other mega-cap tech stocks are also up 1% or more in the early going.

Barn door closing: Besides that, earnings season is mostly in the rear-view mirror. About 97% of S&P 500 companies are done reporting, and of these, 78% beat Wall Street analysts’ estimates, according to FactSet. The caveat is that the bar was rather low going in.

Eye on the Fed

Chances of a 25-basis-point rate hike at the June meeting stand at 60% as of this morning, according to the CME FedWatch tool.

Market participants pushed pause on pause ideas last week in the light of strong economic data. The probability of the Fed pausing hikes at its June meeting fell from 75% early last week to about 30% by Friday, according to the FedWatch Tool.

This change of fortune didn’t appear to bother investors, judging from the stock market rally. That could be in part because each fresh hike represents a lower percentage increase. To be clearer, a 25-basis-point hike when rates are under 1% makes a much bigger economic impact than a 25-basis-point hike with rates at 5%.

What to Watch

Data Parade: Friday’s May Nonfarm Payrolls report stands head and shoulders above all the other data releases this week, but there’s plenty to take in before Friday morning.

The May ISM Manufacturing Index due out Thursday morning is a report that has shown production levels struggling for months. In fact, it’s been in contraction territory below 50 for a headline figure going back to last October without a break. Flash Manufacturing PMI last week from S&P Global was tepid, falling to a headline level of 48.5 in May from 50.2 in April. Not exactly promising for ISM.

New hires: Another major data release straight ahead is the April Job Openings and Labor Turnover Survey (JOLTS) report, due out tomorrow morning after the market opens. In a booming labor market, this one’s been a bit of an outlier lately, showing openings trending lower for several months. They’re still historically high, however, reaching 9.59 million in March, up about 50% from typical prepandemic levels. Consensus on Wall Street is for 9.37 million openings in April, according to Trading Economics.

Debt ceiling primer: A default doesn’t seem likely, but volatility may rise because of investor anxiety over the debate in Washington, D.C. Check here for Schwab’s latest answers to your debt ceiling questions.

Thinking cap

Ideas to mull as you trade or invest

Hatfields and McCoys: The market remains as divided as the infamous warring families, with the largest stocks accounting for the majority of recent gains while most of the smaller companies lag behind. That may reflect expectations that smaller companies are more susceptible to recession pressure than their larger counterparts. For an idea of how this divergence can play out on a given day, think back to last Thursday when info tech stocks rose more than 4%, powered by Nvidia’s blowout earnings. The SPX rose nearly 1% that day, but the equal-weight S&P 500 (SPXEW), which weighs all 500 stocks in the index equally instead of by market capitalization, lost ground. This sort of narrow rally isn’t the kind of broad surge that typically signals a healthy market. The SPX is up 9.5% so far this year, while the equal-weight is flat and the smaller-cap Russell 2000® (RUT) is up just 0.6%. Tech stocks have gained more than 30% so far this year, leading the rest of the pack by a wide margin amid excitement over AI.

Positive turn: After so many months of lackluster consumer sentiment amid inflation worries, Friday’s final May University of Michigan Consumer Sentiment report was a refreshing change of pace. Sentiment came in above expectations even as the people participating in the survey pared their expectations for future inflation. There was a major dip in that category from 4.6% in April to 4.2% in the final May report. That’s down from 5.3% a year ago, perhaps signaling that consumers have started to see slower price growth in some products despite inflation remaining historically high. The Fed closely watches inflation expectations, with Fed Chairman Jerome Powell saying it’s important that they remain “anchored” to avoid a situation where higher price expectations lead to higher wage demands and subsequent price hikes by companies, sometimes called a “wage-price spiral.” On the negative side, it’s possible the report’s lower inflation expectations reflect consumer fears of a slowing economy. Consumer sentiment, while above expectations, was still down 7% from April, and the economic outlook plummeted 17% from last month, the survey says.

Fed 1, Market 0: The game’s taken most of the last year and it looks like the Fed’s storming back to pull out a victory over optimistic investors. As recently as April, fed funds futures built in decent probabilities of as many as three Fed rate cuts by the end of 2023. Today, the market bakes in low odds of any cuts at all, suggesting that the Fed’s hawkish table-pounding accompanied by a diet of steady rate hikes finally worked its way into the minds of the market. Chances of rates falling by December are around 25%, according to the CME FedWatch Tool, compared with 100% earlier this year. This could be good or bad, depending on how you look at it. The bad thing is having higher rates for longer means that inflation hasn’t cooled enough for the Fed to feel it’s made progress. High rates mean loftier borrowing costs and perhaps more pressure on banks. It also could eventually hurt consumer spending, though last Friday’s Personal Spending data argued it hasn’t yet. The good thing? Maybe people are starting to price in lower odds of a recession. It would likely take a major economic downturn for the Fed to cut rates anytime soon. That means watch what you wish for.

Calendar

May 31: May Chicago Purchasing Managers’ Index, April Job Openings and Labor Turnover Survey (JOLTS), and expected earnings from Advance Auto Parts (AAP) and Salesforce (CRM).

June 1: May ISM Manufacturing Index, April Construction Spending, expected earnings from Dollar General (DG), Broadcom (AVGO), lululemon (LULU), and Hormel Foods (HRL).

June 2: May Nonfarm Payrolls

June 5: April Factory Orders and May ISM Non-Manufacturing Index.

June 6: April Trade Balance

 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.