With inflation Worries Receding, Debt Ceiling Negotiations Take Center Stage

Barry Adams
11 May, 2023
New York City

Stocks lacked momentum as investors shifted focus from rate path and inflation worries to bank liquidity and debt ceiling negotiations.  

Focus on Wall Street shifted after the second inflation report in as many days showed steady decline in inflation for the tenth month in a row. 

Rate path worries receded after wholesale inflation dropped to the lowest level since January 2021 and consumer price inflation held steady near 5%. 

Regional bank worries resurfaced after the Los Angeles-based PacWest reported outflow of deposits, following the closure of two California based banks, Silicon Valley Bank and First Republic Bank. 

Regional banks are not out of the woods because elevated interest rates have led to large losses in Treasury securities held by financial institutions. 

Moreover, partisan divide among lawmakers is holding up the debt ceiling revision negotiations. 

For now, markets are hoping that a last minute agreement will avert what could become a crisis with a potential to shut down the federal government and dislocate financial markets beyond the United States. 

G7 finance ministers and central bank governors kicked off their meeting in Niigata, Japan on Thursday but focus was on the ongoing discussion between U.S. leaders in finding a compromise in raising the debt ceiling. 

U.S. Treasury Secretary Janet Yellen said at a press conference in Japan that the U.S. could run out of money on June 1 if the current debt ceiling of $31.4 trillion is not raised. 

Default on financial obligation "would produce an economic and financial catastrophe" and added "there was no good reason to generate a crisis of our own making."

 

Producer Price Index Extended 10-month Decline In April

Producer price index in April increased 0.2% from the previous month, the U.S. Bureau of Labor Statistics reported Thursday. 

The measure of wholesale inflation declined 0.4% in March and was unchanged in February. 

The index for final demand goods increased 0.2% and for services rose 0.3% and contributed to an 80% increase in overall index. 

Core index, which excludes food, energy and services, increased 0.2% in April after increasing 0.1% in March. On an annual basis the core index advanced 3.4%. 

Over one third of the April advance in the index for final demand services can be   traced to a 4.1% rise in prices for portfolio management and 8.4% advance in prices for gasoline was a major factor in the April increase in the index for final demand goods.

On an annual basis, the wholesale price inflation index declined for the tenth month in a row to 2.3% from the high of 11.2% in July. 

 

U.S. Indexes & Yields 

The S&P 500 index decreased 0.4% to 4,121.59 and the Nasdaq Composite was unchanged at 12,307.14. 

The yield on 2-year Treasury notes hovered at 3.82%, 10-year Treasury notes edged up to 3.35% and 30-year Treasury bonds held at 3.74%. 

Crude oil fell $1.63 to $70.91 a barrel and natural gas prices fell 1 cent to $2.18 a thermal unit. 

 

U.S. Stock Movers 

Walt Disney Company declined 8.8% to $92.29 after the theme park operator and media company reported a significant decline in streaming subscribers even as quarterly loss in the division improved. 

Unity Software Inc rose 11.4% to $31.95 after the video game software developer lifted its revenue estimate for 2023. 

PacWest Bancorp plunged 19.5% to $4.88 after the regional bank said deposits declined 9.5% for the week  ended May 5. 

In the first quarter, total interest income increased to $517.7 million from $322.9 million and the company swung to a net loss of $1.2 billion from a profit of $120.1 million and diluted earnings per share was ($10.22) from $1.01 a year ago. 

Other regional banks declined on the news and Western Alliance and Zions Bancorp fell 3%. 

Alphabet Inc Class A stock gained 5.0%to $117.0 after the company released AI tools at its annual conference for developers in Mountainview, California.

The parent of Google and YouTube also released a foldable phone with AI search tools that cost as much as $1,799.

 

European Markets Wavered, BoE Revised Higher Year-end Inflation Level 

European markets attempted a rebound and investors digested inflation reports from two largest economies of the world and awaited resolution to U.S. debt ceiling negotiations. 

The consumer price Inflation in the U.S. cooled for the tenth month in a row and China's consumer prices rose at the slowest pace in more than two years but wholesale inflation fell deeper in the deflation territory. 

The falling energy prices and slower increase in food prices slowed the U.S. inflation in April, which may help the Federal Reserve in pausing interest rate hike at the next meeting. 

The sharp decline in inflation in China was driven by weak consumer demand for manufactured goods after prices rose sharply in the corresponding moth last year. 

China's service inflation was 1.0% because of a stronger rebound in demand for services after travel and leisure activities returned following the end of zero-Covid policy. 

The weak inflation data highlighted slow and uneven recovery in China and most economists are estimating between three and five years before China's manufacturing and service activities return to pre-Covid levels.   

 

China's Wholesale Price Deflation Deepened

China's consumer price inflation dropped to near zero and wholesale inflation extended decline for the seventh month in a row. 

The consumer price index rose 0.1% from a year ago in April from a 0.7% rise in March, the National Bureau of Statistics reported Thursday. 

A high base price in April last year played a key role in comparison, dragging the inflation near zero. 

Prices advanced rapidly last year after the ending of zero-Covid policies but the surge in demand put additional pressure on domestic food supply chains. 

Core CPI, which excludes volatile food and energy, was unchanged at 0.7%.  

Services price index rose at the fastest pace in four months to 1% but the overall weakness indicated sluggish Post-Covid rebound. 

In addition, the producer price index, a measure of wholesale inflation, declined at a faster pace of 3.6% in April from 2.5% in March. 

Wholesale prices declined for the seventh month in a row, and most economists anticipate recovery to take between three and five years. 

 

BoE Estimated Slower Inflation Decline, Rate Hiked to 4.5% 

The Bank of England lifted its key lending rate by 25 basis points to 4.5% as the central bank battled double-digit inflation. 

The Monetary Policy Committee voted 7-2 in favor of the rate hike as the central bank reiterated its commitment in fighting high inflation. 

The latest rate increase is the 12th rate hike in a row since December 2021 as inflation remained near 10%. 

In the accompanying economic update, the central bank said economic activities are expected to be less weak than previous forecasted in April and labor market is expected to remain tighter with jobless rate lower than 4% until the end of 2024.  

The U.K. economy is expected to stall the first and second quarter and advance 0.25% in 2023 compared to a 0.5% contraction estimated in February.  

The Bank of England estimated a slower inflation decline and revised its estimate of inflation by the end of the year to 5.1% from the previous estimate of 3.9%, and drop further to its target rate of 2% in late 2024. 

 

Europe Indexes & Yields 

The DAX index decreased 0.4% or 61.32 points to 15,834.10, the CAC-40 index rose 0.3% or 20.58 points to 7,381.78 and the FTSE 100 index fell 0.14% or 10.75 to 7,730.58. 

The yield on 10-year German Bunds inched down to 2.25%, French bonds traded slightly lower to 2.83%, the UK gilts inched lower to 3.75% and Italian bonds decreased to 4.17%.

The euro edged higher to $1.093, the British pound to $1.257 and the Swiss franc to 89.41 cents.

Brent crude fell $1.49 to $74.91 a barrel and the Dutch TTF natural gas increased €0.04 to €34.99 per MWh.

 

Europe Stock Movers 

Energy and mining companies declined after China reported near zero inflation confirming uneven recovery and weak demand for manufactured goods. 

Wholesale deflation deepened for the seventh month in a row in April and consumer prices rose 0.1% in the month.  

Anglo American, Glencore and Antofagasta declined between 2% and 3% and BP Plc and Shell Plc dropped between 1% and 2%. 

Vodafone Group Plc decreased 1.5% to 91.34 pence and the company announced an expanded partnership with Emirates Telecommunications. 

Deutsche Telekom AG increased 1.2% to €21.51 after the German telecom group slightly lifted its 2023 profit estimate. 

Bayer AG decreased 6.8% to €54.31 after the German drug pesticide maker estimated 2023 earnings to be near the low end of its estimate. 

ThyseenKrupp AG declined 2.2% to €6.52 after the German steel maker swung to a loss in its latest quarter and reported a decline in orders. 

Engie SA increased 1.1% to €14.84 after the French utility company reported a rise in first quarter net income. 

Rolls Royce Holdings decreased 5.5% to 147.78 pence after the aerospace company and defense contractor said it is on track to meet its annual target. 

The struggling aerospace company is in the middle of a restructuring and the new chief executive Tufan Erginbilgic has implemented deep cost cuts as a part of his turnaround plan. 

Telefonica SA declined 3.5% to €3.89 after the Spanish telecom company reported a 58% decrease in first quarter income on higher debt servicing expenses.