Debt Ceiling Showdown: Talks in Focus, but CPI Data Could Have More Immediate Impact

Wall Street is on tenterhooks this morning ahead of tomorrow's critical April Consumer Price Index (CPI) report and the start of White House talks about the debt ceiling today. The market barely moved yesterday, and a narrow trading range may be the case again today ahead of the data.
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Key Takeaways

  • Investors await Wednesday’s April inflation data that’s expected to show more gains

  • Crude falls after China’s April imports unexpectedly crater, raising reopening doubts

  • White House in focus as party leaders gather to talk with President Biden on debt ceiling

Alex Coffey, Senior Trading Strategist, TD Ameritrade

(Tuesday market open) Wall Street’s collective eyes turn to Washington, D.C., today when President Biden and congressional leaders gather to discuss the debt ceiling.

Neither side has indicated that it intends to budge, but investors might be encouraged just to see them talking. The Treasury Department warned last month that the country could default as soon as June 1 if Congress doesn’t suspend or raise the debt ceiling.

Beyond that, inflation data due out tomorrow and Thursday could help set the tone. Wednesday morning brings the April Consumer Price Index (CPI), followed Thursday by the Producer Price Index (PPI). Disney (DIS) reports tomorrow afternoon.

Stocks traded in a narrow range yesterday, and that may be the case again today with CPI looming.

Morning rush

  • The 10-year Treasury note yield (TNX) fell 3 basis points to 3.48% and continues to hover near the 3.5% mark.
  • The U.S. Dollar Index ($DXY) inched up to 101.65 but remains near recent lows.
  • The Cboe Volatility Index® (VIX) futures rose to 17.62 but is well below last week’s highs above 20.
  • WTI Crude Oil (/CL) fell to $72.43 per barrel after soft Chinese data.

Just In

Reopening blues:  A steep drop in April Chinese imports reported last night offered more evidence that the economy’s recovery from the Covid lockdown isn’t as strong as many had hoped. The data may be one reason crude oil prices are slightly lower this morning. Imports to China unexpectedly shrank by 7.9% year-over-year to $205.2 billion in April. Analysts had expected no change, according to Trading Economics. This follows a 1.4% drop in March and reinforces recent statements by some U.S. companies about lethargic Chinese demand.

Rose Garden view: Besides a couple of fresh earnings reports, focus today might center on the White House talks. This could cause volatility to rise, as it did in a similar situation back in 2011. Anyone planning to make short-term trades in the next two weeks should have that in mind and may want to keep positions sizes smaller than usual. For now, investors appear to be waiting for the outcome of the talks, along with this week’s inflation data, before they take new positions.

As for the talks themselves, optimism isn’t extremely high.

“Don’t expect a big breakthrough, as both sides remain wedded for now to their unrealistic positions,” says Michael Townsend, managing director of legislative and regulatory affairs at Schwab. “Expect the stalemate to continue but watch for the tone of statements from the participants after Tuesday’s meeting to see if things are starting to move in a positive direction.

There’s uncertainty about when a default might happen, despite the focus on June 1. It might be “a number of weeks” after June 1, according to Treasury Secretary Janet Yellen’s recent note to Congress. A timing update from Treasury is possible later this month.

There are already signs of the debt ceiling drama playing out in the Treasury market, where shorter-term notes that might expire before the ceiling deadline generally command higher yields than longer-dated ones.

Stocks in the Spotlight

Earnings ups and downs: Shares of data analytics company Palantir (PLTR) soared 17% in premarket trading after the company beat analysts’ earnings and revenue estimates and raised guidance. The company highlighted its artificial intelligence platform. On the other side of the earnings spectrum, PayPal (PYPL) is down 5% ahead of the open even though the company topped analysts’ views with its results. Disappointment over guidance and margins appeared to hurt shares.

House of mouse: Disney (DIS) earnings tomorrow after the close are another touchpoint this week. The company’s streaming business faces intense competition, and DIS recently announced a second round of layoffs that ultimately will reduce head count by 7,000 as the company reorganizes and cuts costs. The earnings report and conference call could help investors learn whether DIS intends to tighten its belt further. Meanwhile, theme parks and hotels could get a lift from what’s been a robust consumer spending environment amid low unemployment and post-pandemic travel demand. DIS could also shed light on China’s reopening progress.

AI update:  Google’s annual developer conference tomorrow will focus on artificial intelligence (AI) as the search giant prepares to unveil generative AI updates, including a general-use large language model (LLM)—a type of AI algorithm—called PaLM 2, according to CNBC.

Eye on the Fed

The probability of a June rate hike now stands at 16%, according to the CME FedWatch Tool. That’s up from no chance a week ago. The tool prices in about a 99% chance that the Federal Reserve will cut rates by the end of this year. However, the Fed didn’t drop any hints last week about chances for rates to fall and left the door open to actually raise rates. We’ll see what happens to the probability after tomorrow’s CPI data.

The interesting piece here is the divergence between market expectations and the Fed’s outlook. The market seems certain something in the financial system—maybe bank failures of disruption of the money flow or an economic downturn—is ahead because that’s essentially what the Fed said is required for an easing of monetary policy. The market has been pricing in lower rates for more than a year, however, and it hasn’t come to fruition. The question is whether the Fed is finally leveling off, and if the market is right about some sort of significant disruption ahead that ultimately forces the Fed’s hand.

What to Watch

Pricing power: The April CPI report is due before the open Wednesday, and analysts expect the headline number to rise 0.4% month-over-month and core CPI (which strips out energy and food) to also climb 0.4%, according to Trading Economics. That’s up from 0.1% and 0.4% in March. Monthly numbers like the ones forecast would mean basically no change in year-over-year consumer inflation, now near 5%.

The April Producer Price Index (PPI) follows CPI on Thursday morning. Again, if the numbers show signs of plateauing in either or both reports, listen closely for reactions this week from some of the scheduled Fed speakers. There are signs already from other data—like April wage growth—that the Fed is having less progress against rising prices. Any new hints from this week’s data that back up those impressions would likely throw the ball back into Fed Chairman Jerome Powell’s court.

CHART OF THE DAY: DOLLAR TAILWIND. You can find plenty of reasons why the Technology Select Sector Index (IXT—purple line) is higher this year after suffering immensely in 2022. But one of them could be the path of the U.S. dollar index ($DXY—candlesticks). The technology sector has among the greatest exposure to overseas markets of any U.S. sector, and a weaker dollar tends to raise demand overseas for U.S. products. The strong dollar last year was a huge headwind for tech. Data sources: S&P Dow Jones Indices, ICE. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

If inflation progress stalls: For the Fed, a strong CPI report tomorrow could represent another conundrum. Progress on the inflation fight appears to be stalling, but the Fed’s rate increases arguably contributed to the recent bank failures and general fears that the Fed might be hiking the economy into a recession. So far, the Fed’s been able to hike 500 basis points in just over a year without causing too much of an outcry, in part because the economy remains in growth mode and unemployment is low. If this started to change (and some recent data does suggest the economic engine may be cooling), the Fed would really find itself in a tough place. There’s a name for conditions where the economy falls into recession but inflation keeps rising: Stagflation. There’s really no textbook for a central bank in that scenario.

Tracking investors: The Investor Movement Index ® (IMXSM) increased to 4.74 in April, up from 4.57 in March. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors were doing and how they were positioned in the markets. TD Ameritrade clients were net buyers of equities overall during the period. Popular names bought included Tesla (TSLA), AT&T (T), and Verizon (VZ). There appears to be steady, slow recovery of sentiment in IMX after it bottomed out in November and December at levels not seen since April 2020. The actual buying and selling activity is intriguing and somewhat contrarian. For instance, stocks bought include TSLA, which has struggled, and some real estate investment trusts (REITS). That’s possibly a contrarian trade, as REITS have also struggled. On the sell side, there appeared to be some rotation out of Apple (AAPL), Meta (META), and Microsoft (MSFT)—which were among the big techs that did well in April. It looks like investors were trying to be tactical and not just jumping on the momentum trade.

Yield signs: The 10-year Treasury note yield (TNX) approached 3.6% late last month but then fell to 3.36% late last week, below an area seen as technical support. Though it rebounded from there, the Thursday descent took it to its lowest point in nearly a month, and rates likely would head lower still if bank and debt ceiling worries mount. Until rebounding early this week, the 2-year Treasury note yield had been declining much more quickly than the 10-year, reflecting investors’ ideas that the Fed may have to lower rates earlier than it anticipates to address economic slowing. The 2/10 yield curve inversion stood near 47 basis points on Monday, down from over 100 basis points at its peak in early March. If this gap continues to narrow due to weakness in the rate-sensitive 2-year yield, it could indicate investors building in lackluster economic growth 


May 10: April Consumer Price Index (CPI) and core CPI, and expected earnings from Disney (DIS).

May 11: April Producer Price Index (PPI) and core PPI and expected earnings from (JD).

May 12: Preliminary May University of Michigan Consumer Sentiment

May 15: May Empire State Manufacturing

May 16: April Retail Sales and expected earnings from Home Depot (HD).

Happy trading,                                  



Key Takeaways

  • Investors await Wednesday’s April inflation data that’s expected to show more gains

  • Crude falls after China’s April imports unexpectedly crater, raising reopening doubts

  • White House in focus as party leaders gather to talk with President Biden on debt ceiling

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