Hello, friends! Let’s sit down, grab a cup of coffee, and chat about this whirlwind of a week in the world of finance. Trust me, it’s been quite the ride! Our economy has been swinging from one daring maneuver to the next, proving that it’s got more stamina than a marathon runner.
From the corridors of power in Washington to the bustling hubbub of Wall Street, everyone’s been super busy trying to make sure our economy stays on track. And you know what? It’s been working!
Imagine our economy as a trapeze artist, soaring high above the crowd. We’ve all been watching with bated breath as it makes some death-defying leaps. But just like a seasoned circus performer, it’s landed each one with grace and confidence.
The stars of our show? None other than the debt ceiling deal and our ever-reliable buddy, the Federal Reserve. These two have been putting on a show of strength and stability, standing tall amidst the rollercoaster ride of market shifts.
So, as we brace ourselves for the next round of financial acrobatics, it’s comforting to know our economy has what it takes to keep the show going. Here’s to celebrating the remarkable feats we’ve witnessed this week and the robust spirit of our economy – it’s like a friend who’s always there when you need them! Can’t wait to see what the next act brings!
Navigating Fiscal Waters with Boldness
In an unprecedented turn of events, President Biden and Speaker McCarthy join forces, promising to raise the nation’s debt ceiling. This bipartisan agreement awaits a swift journey through the Senate and is poised to become law, offering a beacon of certainty in turbulent fiscal waters.
The Deal: A Chapstick for the Financial Jitters
The proposed legislation presents a two-fold solution: it indefinitely lifts the debt ceiling until January 1, 2025, and establishes enforceable expenditure limits for the next two years. These caps, when compared to the Congressional Budget Office’s (CBO) recent projections, could result in a whopping $245bn savings.
Given these parameters, the spending pattern of the government would undeniably shift downward, promising the potential for substantial deficit reductions. The CBO estimates that these savings could add up to $1.5tn over the next decade, which, when taking certain auxiliary agreements into account, still stands at a substantial $1.0tn.
The Impact: Defeating Default, But More Mountains to Climb
While this agreement helps sidestep the treacherous precipice of government default, it does not entirely quell the specter of a potential government shutdown. This arrangement underscores a scenario akin to 2011, when the Budget Control Act elevated the debt ceiling, yet necessitated the passage of funding bills by Congress. Despite initial hiccups, a budget deal was eventually realized, albeit via several continuing resolutions extended into late December.
Anticipating Future Fiscal Moves: Walking the Tightrope
Looking ahead, Congress faces the demanding task of drafting a budget to support the government’s activities for Fiscal Year 2024, beginning October 1. The road to budget agreement may be fraught with tension and the odds of a government shutdown cannot be entirely dismissed. However, the deal over the debt limit provides a navigational compass for Congress, offering guideposts to adhere to amidst these challenging negotiations.
It’s important to note that while government shutdowns carry their share of discomfort, they are generally less damaging than a default scenario. Moreover, this agreement includes a distinctive caveat in Section 102, which serves as an impetus to ensure meaningful deliberation over appropriations.
A Peek into the Federal Reserve’s Dance with Fiscal Rhythms
Early in the week, market forecasts tipped towards a 50% probability of a 25bp increase at the June FOMC meeting, spurred by robust economic signals, persistent inflation, and tight labor market conditions. Despite the anticipatory buzz around a potential hike, market pricing witnessed a downswing, courtesy of dovish remarks from Governor Jefferson and Philadelphia Fed President Harker.
The Federal Reserve’s Treading on Thin Ice: A Pause or a Skip?
Interestingly, both Jefferson and Harker highlighted the possibility of the Fed skipping a meeting. However, they maintained that this should not be misconstrued as a pause in action. Such a stance aligns with our perspective that the Fed might likely adopt a ‘hawkish hold’ stance in its June meeting.
Unveiling the Q1 and Q2 GDP Dynamics: A Steady Course
On the GDP front, the initial estimate for the second quarter remains unchanged at 1.1%, while the first quarter saw an upward revision to 1.3%. The trade deficit for advance goods widened sharply in April due to a decline in exports and a rise in imports, while April’s core capital goods orders and shipments surpassed expectations, enhancing our tracking estimate for 2Q equipment spending.
Charting the Way Forward
The current fiscal environment is undoubtedly challenging, but the recent developments provide reason for optimism. The government’s proactive approach in addressing the risk of default is commendable, and the expected hike in Federal Reserve rates shows confidence in the economy. The road ahead is not without obstacles, but with careful navigation, we can maintain a steady course. The ebb and flow of fiscal policy are as inevitable as the tide, but the resilience of our financial system gives us reason to be optimistic.
The Hot Zones this Week
Another thrilling week of market activity! As we navigate through this week’s hot zones, remember that trading during key economic releases can be akin to sailing through stormy waters—thrilling, yes, but potentially turbulent. So, let’s keep our eyes on the horizon, our hands steady on the helm, and remember, fortune favors the well-prepared.
Each week there are zones where trading can get wild. I call these the hot zones.
Monday
For the upcoming May ISM services report, we are projecting an uptick of 1.1 percentage points, resulting in an index score of 53.0. After witnessing a decline in the index over the last couple of months, we anticipate a rebound in the May assessment. The primary factor behind the expected rise in the headline figure is likely to be a surge in the business activity index. Hiring in the services sector has maintained a solid pace recently, and there was an increase in the new orders index in April. Both of these factors should lend support to the overall sectoral activity.
Macro Market
Economic Growth
In the final quarter of 2022, GDP growth decelerated to 0.9% and it is predicted to reduce further to -0.2% by the end of 2023. This downturn results from the delayed impacts of stricter monetary policy and financial conditions that are dampening economic activity. However, a revival is anticipated by the last quarter of 2024.
Inflation
The anticipated mild economic downturn this year, coupled with sustained goods deflation, should drive disinflation during the course of the year. The headline PCE index, which experienced a 5.7% surge in 2022 (from 4Q to 4Q), is projected to rise by 2.9% in 2023. Meanwhile, the core inflation, which expanded by 4.8% previously, is expected to settle at around 3.3% in 2023. Our forecast implies that by the close of 2024, inflation will align closely with the Federal Reserve’s 2% target.
Federal Reserve
As anticipated, the Federal Reserve increased its policy rate by 25 basis points, pushing it to the 5.0-5.25% range, and hinted that it might have concluded the current cycle of rate hikes. However, it did not completely dismiss the possibility of future increases and maintains an inclination to adjust its policy rate upwards if necessary.
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Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
In a review of aggregate estimates and revisions, it’s projected that year-over-year (Y/Y) earnings for the first quarter of 2023 (23Q1) will see a slight decline of -0.01%. When excluding the energy sector, this estimate dips further to -1.7%.
Out of the 494 S&P 500 companies that have already reported their Q1 2023 earnings, approximately 76.9% have outperformed analyst predictions. This percentage is notably higher than the long-term average of 66.3% and also surpasses the preceding four-quarter average of 73.5%.
Furthermore, during the week of June 2, it is expected that an additional four S&P 500 companies will be reporting their quarterly earnings.
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 23Q1 Y/Y earnings are expected to be -0.01%. Excluding the energy sector, the Y/Y earnings estimate is -1.7%.
- Of the 494 companies in the S&P 500 that have reported earnings to date for 23Q1, 76.9% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%.
- During the week of June. 2, four S&P 500 companies are expected to report quarterly earnings.
Global Spotlight
Turkey’s Economic Policy Revolution
Turkey teeters on the verge of an economic reform as President Recep Tayyip Erdogan steps into another term in office on June 3. The country’s political arena is abuzz with predictions of a cabinet makeover featuring technocratic figures aimed at recalibrating Turkey’s financial strategy. Forecasts point to former Deputy Prime Minister Mehmet Simsek possibly taking the reins of the Turkish Treasury. This move could invoke a sigh of relief from international investors who have been anxiously watching the local economic landscape marked by unconventional economic practices, soaring inflation, and a fluctuating lira. However, even with Simsek’s potential inclusion, Erdogan’s entrenched economic views will likely continue to color his policies as he navigates a term where his personal legacy and Turkey’s global standing remain under the spotlight.
Mali’s Constitutional Crossroads
Mali launches into its two-week campaign period on June 2, ahead of a crucial constitutional referendum – a significant stride in the nation’s journey back to civilian rule. Originally planned for March, the vote is now slated for June 18, where the Malian populace will decide on the creation of new regions, the augmentation of presidential authority, and the institution of regional councils. Despite parts of Mali being ungoverned and lingering insecurity potentially hampering voter turnout, this referendum allows the interim government to project an image of advancement towards civilian rule – a step that many in the ruling military junta may not genuinely be planning for come February 2024.
The Shangri-La Dialogue Dialectics
Between June 2-4, over 600 defense officials from 40 countries converge in Singapore for the annual Shangri-La Dialogue. The symposium is expected to shine a spotlight on the escalating U.S.-China disagreements. While direct discussions between Chinese and U.S. defense representatives are off the cards, countries like Australia advocate for open dialogue between these two powerhouses. Despite this, the Chinese defense minister is scheduled to meet with his Japanese counterpart to actualize newly established military communication channels. Concurrently, the United States will leverage this gathering to strengthen its regional security infrastructure, with tripartite and minilateral dialogues scheduled with partners such as Australia, Japan, the Philippines, and South Korea. These meetings could facilitate deeper defense bonds between participating nations.
Mexico’s Electoral Landscape
The Mexican states of Coahuila and Mexico prepare for gubernatorial and local elections on June 4. This political contest brings the opposition Institutional Revolutionary Party (PRI) head-to-head with the ruling Morena party, in a bid to defend its final two bastions. Polls suggest a neck-and-neck competition, with Morena currently holding sway over 31 states and Mexico City. A gubernatorial victory for Morena in either state could tilt the scales further in their favor, providing a substantial leverage ahead of the June 2023 general elections. The elected governors would likely lead the charge for their respective federal parties’ campaigns.
