Global Markets May Be Too Optimistic About U.S. Debt Ceiling Talks

Barry Adams
16 May, 2023
New York City

Investors remained hopeful that Washington lawmakers will avert a government shutdown, but ground realities are sending different signals. 

With President Biden's international travel commitments over the next few weeks. an agreement has to be in place this week because it still needs approvals from both chambers of the U.S. Congress before the first week of June.  

President Joe Biden is scheduled to travel to Japan for a G7 meeting followed by a trip to Papua New Guinea and then to attend a meeting of Quad nations, Japan, India, Australia and the United States. 

Moreover, the agreement has to be codified in a bill and needs approvals from both chambers of Congress and signed by the U.S. President no later than June 7. 

With each passing day without an agreement on debt ceiling, averting the U.S. government shutdown is looking difficult. 

Moreover, raising the debt limit is not going to increase federal government spending but the agreement will only allow the federal government to implement a spending plan that is already authorized by the Congress and president.  

Treasury Secretary Janet Yellen reiterated on Monday that the federal government is most likely to run out of cash as early as two weeks and the failure to suspend or lift the debt ceiling is costing the Treasury in higher interest rates. 

The yields on Treasury notes maturing in four weeks has jumped to 5.60%. 

Standard & Poor's lowered the U.S. government debt rating to AA+ from AAA in 2011  after congressional Republicans threatened a government shutdown. 

Last time the U.S. federal government shut down for 35 days between December 22, 2018 and January 25, 2019.   

Investors were also rattled after Home Depot forecasted sales and comparable store sales in 2023 to decline between 2% and 5% from 2022

 

U.S. Retail Sales Advanced Slightly Higher  

Retail and food services sales increased 0.4% in April to $686.1 billion, the U.S. Census Bureau reported Tuesday. Sales increased 1.6% from a year ago. 

Preliminary estimate of retail and food services sales are adjusted for seasonal and calendar variations but not for inflation. 

The consumer price inflation from the previous month was 0.4%, indicating that sales are just keeping up with inflation but real sales are not expanding. 

Retail trade sales were up 0.4% from the previous month, and up 0.5% from a year ago and nonstore retailers were up 8.0% while food  services and drinking places were up 9.4%.  

Sales of motor vehicles and parts dealers increased 0.4% and building materials and garden supplies advanced 0.5% and sporting goods stores decreased 3.3%. 

Sales at gasoline stations declined 0.8% in April, despite the rise in gasoline prices, on top of 14.6% fall in sales in the month a year ago. 

Core retail sales, which excludes automobiles, gasoline and building materials, accelerated to 0.7%, indicating sustained consumer demand. 

 

U.S. Indexes & Yields 

The S&P 500 index decreased 0.34% to 4,118.83 and the Nasdaq Composite rose 0.06% to 12,369.66.

The yield on 2-year Treasury notes increased to 4.03%, 10-year Treasury notes edged up to 3.53% and 30-year Treasury bonds held at 3.87%. 

Crude oil rose $0.55 to $70.55 a barrel and natural gas prices fell 1 cent to $2.36 a thermal unit. 

 

U.S. Stock Movers 

Home Depot Inc decreased 2.2% to $282.54 after the home improvement retailer reported smaller-than-expected revenue. 

Dish Network Corp increased 7.2% to $6.57 after director James DeFranco said in a regulatory filing the purchase of 3 million shares. 

Capital One Financial Corp increased 6.5% to $94.95 after Warren Buffett controlled Berkshire Hathaway acquired a new stake in the company for $950 million. 

Nu Holdings Ltd increased 5.7% to $6.42 after the fintech company reported first-quarter revenue of $1.6 billion and adjusted earnings of $182.4 million. 

 

European Markets Near Flatline, Eurozone GDP Barely Advanced

European markets showed little movement amid a flood of economic data and corporate earnings. 

Investors generally stayed on the sidelines after China reported weaker than expected rebound in retail sales, fixed investments and industrial production in April. 

In the UK jobless rate increased to 3.9% in the first quarter from 3.8% in the last quarter of 2022, the Office for National Statistics reported Tuesday. 

The slight increase in the jobless rate supported the case that the Bank of England may pause rate hike at its next policy meeting on June 22. 

Closer to home, investors digested economic growth data in the eurozone in the first quarter. 

 

Euro Area GDP Barely Increased In Q1

Seasonally adjusted GDP in the first quarter in the Euro Area barely increased 0.1% from the previous quarter and 0.2% in the Eu, according to the flash estimate released by Eurostat Tuesday. 

Compared with the same quarter of the previous year, seasonally adjusted GDP increased 1.3% in the euro  area and 1.2% in the EU in the first quarter, after rising 1.8% in the euro area and 1.7% in the EU in the  fourth quarter of 2022. 

During the first quarter of 2023, GDP in the United States increased 0.3% compared to the previous quarter and increased 1.6% from a year ago. 

Spain led the region with GDP expanding 3.8% from a year ago followed by 2.6% in Ireland, 2.8% in Romania, 2.5% in Portugal, 0.8% in France and -0.1% in Germany. 

 

Employment Expands in Euro Area and EU 

The number of employed persons increased 0.6% in both the euro area and the EU in the first quarter of 2023, compared with the previous quarter. 

In the fourth quarter of 2022, employment had increased 0.3% in both the euro area and the EU.

On an annual basis, employment increased 1.7% in the euro area and 1.6% in the EU in the first quarter, after rising 1.5% in the euro area and 1.3% in the EU in the fourth quarter  of 2022.

 

Europe Indexes & Yields 

The DAX index decreased 0.1% to 15,897.93, the CAC-40 index fell 0.1% or to 7,406.01 and the FTSE 100 index fell 0.4% to 7,751.08. 

The yield on 10-year German Bunds inched down to 2.26%, French bonds traded slightly lower to 2.89%, the UK gilts inched lower to 3.74% and Italian bonds decreased to 4.14%.

The euro edged higher to $1.089, the British pound to $1.253 and the Swiss franc to 89.29 cents.

Brent crude decreased 36 cents to $74.86 a barrel and the Dutch TTF natural gas decreased €0.49 to €31.82 per MWh.

 

Europe Stock Movers 

Vodafone Group dropped 5% to 85.02 pence after the company said it plans to cut as many as 11,000 jobs in the next three years. 

The newly appointed chief executive Margherita Della Valle also said free cash flow in 2023 is likely to decline by €1.5 billion. 

Embracer Group plunged 16% to SEK 44.40 after the game developer reiterated its annual earnings outlook. 

Britvic Plc increased 1.2% to  939.28 pence after the beverage maker reported an increase in first-half pre-tax profit driven by higher sales. 

Imperial Brands plc declined 0.6% to  1,862.72 pence after the cigarette maker reiterated its full-year outlook. 

Bouygues SA decreased 2.5% to 30.92 after the French construction to telecom group reported a slight increase in first quarter net loss.