Good news for markets next week. Everyone agrees the debt ceiling ‘X date’ is not here yet
Washington can hardly agree on anything, but the consensus everywhere is that the “X date,” when the Treasury can no longer pay the government’s bills unless the debt ceiling is raised, won’t arrive any earlier than June 1 — and maybe not for weeks after. Good news for markets next week: no default, no credit agency downgrade, no apocalypse. Just further talks between White House and Congressional staffers, leading to another meeting between President Joe Biden and Congressional leaders before Biden leaves next Wednesday for a G-7 summit in Tokyo. The bad news is that complacency is nigh in the stock market, as shown by the CBOE Market Volatility Index (the VIX) trading below 18 on Friday, and having fallen almost 22% in 2023. Goldman Sachs figures that expectations of future stock market volatility have dropped because bond yields have declined in 2023, helping tech stock valuations, U.S. economic growth has held up and first-quarter corporate profits were solid. Unfortunately, that only increases “the vulnerability to shocks near term, including the U.S. debt ceiling and renewed financial stability concerns,” wrote Christian Mueller-Glissmann, Goldman’s head of asset allocation research in London. Bill Blain, market strategist at Shard Capital, also in London, assumes that “at some point something will break” in the debt talks, “and after a bit of noise there will be an agreement leaving everyone still angry and annoyed, and the spikes in [ short-term Treasury bill ] rates will mellow – but confidence will be cracked.” Worrying 2011 precedent Recent history tells investors that stocks will move more violently during a debt ceiling standoff. Similar impasses in 1996 and 2013 came in the midst of bull markets and were followed by renewed rallies, Nick Lentini, U.S. equity strategist at Morgan Stanley, recently noted. The episode that worries Wall Street most occurred in 2011, when the markets were already shaky, as they are today. “Equities sold off both into the resolution and continued to sell off an additional 12% in the two months following resolution,” Lentini said. By some lights, the stock slump surrounding the debt limit crisis in 2011 was even worse than that. That year, the “S & P 500 peaked on the final trading day of April and fell 19.4% to its final low on October 3,” according to Jeff Hirsch, editor of the Stock Trader’s Almanac . Almost all of that decline came in three weeks at the height of the summer, when both Standard & Poor’s and Moody’s Investors Service reviewed the U.S. AAA credit rating, culminating in S & P downgrading the U.S. to AA+ in early August. As a result, “the current debt limit dispute and its comparison to 2011 remains a concern,” Hirsch said recently. “Market volatility is likely to rise and remain elevated until a resolution is reached. We still see a range bound market [so] upside is likely to be limited.” That’s the view at Goldman, too, which is telling investors that stocks are unlikely to make much progress since it’s so late in the economic cycle. “While inflation is normalizing, growth is also slowing and central banks are still tightening policy, which limits upside to risky assets,” Goldman said this week. Keeping the government engine running is critical to the U.S. skirting a recession. Morgan Stanley economists assume that “consumer spending could fall by 8% to 12% in a given month if [households] lose all social benefits excluding Social Security.” In the meantime, however, little reaction to the debt talks is likely until June 1 draws closer, when the Treasury Department’s “extraordinary measures are nearly exhausted,” said Rob Haworth, senior investment strategist at U.S. Bank Asset Management in Seattle. Retail sales update Debt negotiations aside, investors get updates next week on the state of American consumer spending when April retail sales are reported Tuesday alongside earnings from Home Depot. Target and TJX release their latest results on Wednesday followed by Walmart on Thursday, with investors listening closely to management comments, since consumer spending still accounts for 68.5% of the economy. Deutsche Bank estimates that April retail sales expanded month over month by 0.7%, the market consensus. The firm figures that sales excluding automobiles climbed 0.5%. Credit Suisse is less optimistic, forecasting that April retail sales grew by 0.6%, but, excluding vehicles, were unchanged. New York Fed President John Williams is scheduled to speak twice next week, while Fed Chairman Jerome Powell sits down for a conversation with former Fed chief Ben Bernanke at a central bank gathering in Washington next Friday. — CNBC’s Hakyung Kim, Fred Imbert and Michael Bloom contributed to this report. Week ahead calendar Monday 8:30 a.m.: Empire State Index (May) Earnings: Catalent Tuesday 8:30 a.m.: Retail sales (April) 9:15 a.m.: Industrial production (April) 10 a.m.: Business Inventories (March) 10 a.m.: NAHB Housing Market Index (May) 12:15 p.m.: N.Y. Fed President John Williams speaks before the University of the Virgin Islands Earnings: Keysight Technologies, Home Depot Wednesday 8:30 a.m.: Building permits (April) 8:30 a.m.: Housing starts (April) Earnings: Target, TJX Cos., Synopsys, Cisco Systems, Take-Two Interactive Thursday 8:30 a.m.: Initial jobless claims (week ended May 13) 8:30 a.m.: Philadelphia Fed Index (May) 9:05 a.m.: Fed Governor Philip Jefferson speaks on the economic outlook at the National Association of Insurance Commissioners (NAIC) in Washington, D.C. 10 a.m.: Existing home sales (April) Earnings: Bath & Body Works, Walmart, Applied Materials, Ross Stores, DXC Technology Friday 8:45 a.m.: N.Y. Fed President Williams delivers the keynote address at the Thomas Laubach Research Conference in Washington, D.C. 11 a.m.: Fed Chair Jerome Powell in conversation with Ben Bernanke, former Chair of the Board of Governors of the Federal Reserve System, at the Thomas Laubach Research Conference, Washington, D.C. Earnings: Deere
