Stocks Rally On Wall Street While Mood In Washington Sours

Barry Adams
25 May, 2023
New York City

Stocks powered ahead despite the rising uncertainties about the debt ceiling talks and the rising prospects of federal government default on its obligations. 

The rift between the White House and the Republican leaders appears to be widening by the day. Republicans are leveraging their slim majority in the House and accomplish their longstanding demands to cut discretionary spending but keep the inflated defense and military budget intact. 

The central sticking point in negotiations is focused on the overall spending, Republicans are demanding to roll back the fiscal year spending at the year 2022 level.   

Meeting that baseline spending objective would require cutting about 15% to 20% spending across several government departments including transportation, healthcare and education. 

Republicans are also seeking large cuts in Medicaid, lift means test and work requirements for the food stamps or Supplemental Nutrition Assistance Program and simplify permits for new projects in the energy and mining sector. 

 

Fitch Ratings Placed U.S. Debt On Negative Watch List 

Fitch Ratings, one of the leading three rating agencies, belatedly placed the U.S. debt on a negative watch list. 

Fitch placed the U.S. long term debt rating AAA on a watch list with a potential downward rating if lawmakers fail to agree on lifting the debt ceiling. 

The rating agency cited ongoing lack of agreement among lawmakers to raise the U.S. federal government debt  in time increases the risk that the government may miss some payments. 

The rating agency was quick to note that it anticipates an agreement before the so-called X-date anytime after June 1 when the government is expected to run out of cash. 

S&P Global and Moody's have not placed the U.S. debt rating on a watch list so-far, despite the growing uncertainties surrounding the debt ceiling talks and the possibilty of a first ever debt default. 

S&P Global lowered its debt rating of the U.S. government debt in 2011 to AA+ from AAA after the previous protracted debt ceiling negotiations in 2011, and left it unrevised since then.  

Lower debt rating translates to higher interest rate, meaning higher cost of borrowing. 

 

US First Quarter GDP Revised Higher 

U.S. GDP in the first quarter was revised higher to 1.3% in the first quarter, from the first estimate of 1.1%, the Bureau of Economic Analysis reported Thursday. 

Despite the upward revision, economic growth in the first quarter is the weakest since the second quarter 2022. 

Consumer spending accelerated in the first quarter to 3.8% from the previous estimate of 3.7% and private inventory estimate subtracted 2.1 percentage points, less than 2.3 percentage point estimated in the first estimate. 

Net external demand contributed positively to the latest  GDP revision after exports rose at a faster pace than imports. 

Nonresidential fixed investment was revised upward to 1.4% from 0.7% and public spending to 5.2% from 4.7% in the first estimate respectively. 

However, residential fixed investment shrank at the faster pace of 5.4% from 4.2% in the first estimate. 

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.8% to 4,147.81 and the Nasdaq Composite rose 1.6% to 12,675.52. 

The yield on 2-year Treasury notes increased to 4.47%, 10-year Treasury notes edged up to 3.76% and 30-year Treasury bonds held at 3.98%. 

Crude oil rose $1.51 to $72.83 a barrel and natural gas prices rose 2 cents to $2.39 a thermal unit. 

 

U.S. Stock Movers 

Nvidia Corporation soared 23.5% to $375.16 after the advanced chip maker reported better-than-expected quarterly sales and earnings. 

The company also lifted its annual outlook on the back of demand for its AI chip. 

Other semiconductor stocks traded higher after results from Nvidia boosted the prospects for the sector. 

Taiwan Semiconductor Manufacturing Company Ltd increased 8.7% to $97.94 and Advanced Micro Devices, Inc gained 7.8% to $116.48.  

Best Buy Company Inc jumped 1.9% to $70.49 after the electronics retailer reported slightly better-than-expected adjusted earnings in its latest quarter. 

American Eagle Outfitters Inc dropped 16.4% to $10.30 after the specialty apparel retailer estimated second quarter revenue to decline on tough comparison. 

 

U.S. Default Worries Drag Down European Markets Second Day 

European markets lacked direction in weak sentiment after German economic growth was revised lower. 

Benchmark indexes trended lower and Germany's first quarter economic growth was revised to 0.3% decline, second quarterly contraction in a row, indicating technical recession. 

The White House and the Republican leaders reported progress in the latest round of talks but an agreement was still further than expected. 

The U.S. federal government is expected to run out of cash in six days but leaders of both parties showed no urgency to strike a deal, suggesting that any deal may be struck only in the last hour. 

Fitch Ratings placed the U.S. debt with "AAA" rating  on watch with a potential downgrade, the first rating agency to take the proactive step. 

Two other leading agencies, S&P Global and Moody's, have yet to announce their rating outlook, despite the heightened level of partisanship that could lead to catastrophic debt default.   

Investors rely on credit ratings as one of the metrics in assessing the risk profiles of governments and companies. 

 

German Economy In Technical Recession 

Germany's GDP contracted at 0.3% in the first quarter from the previous quarter, the Federal Office of Statistics reported Thursday. 

The first quarter GDP adjusted for calendar and seasonal factors was revised to a decline from the preliminary estimate of flat growth on weak household consumption.   

The economy contracted 0.2% from a year ago in the first quarter. 

Germany's economy declined 0.5% in the fourth quarter and entered into a technical recession with two quarterly declines in a row. 

Household consumption declined 1.2% in the quarter after elevated prices forced consumers to trim spending, automobile sales were also down after the government withdrew the subsidy for electric and hybrid vehicles. 

Moreover, government spending fell 4.9% but gross fixed capital formation in machinery and equipment increased 3.2% and net exports contributed 0.7% to the GDP in the first quarter. 

 

Europe Indexes & Yields 

The DAX index decreased 0.3% to 15,793.80,  the CAC-40 index fell 0.3% to 7,229.27, and the FTSE 100 index decreased 0.7% to 7,570.87.

The yield on 10-year German Bunds inched up to 2.47%, French bonds traded higher to 3.04%, the UK gilts inched higher to 4.31% and Italian bonds increased to 4.31%.

The euro edged lower to $1.075, the British pound to $1.234 and the Swiss franc to 90.55 cents.

Brent crude declined $2.61 to $75.71 a barrel and the Dutch TTF natural gas decreased €2.61 to €25.23 per MWh.

 

Europe Stock Movers 

Deutsche Boerse AG declined 1.06% to €163.90 after the German stock market operator made a formal offer to acquire SimCorp at 735.0 Danish kroner per share. 

Johnson Matthey Plc declined 1.7% to 1,837.0 pence after the UK-based chemical company reported a decline in annual profit. 

Hill & Smith Plc advanced 4% to 1,420.45 pence after the company reported a record operating performance in the four months to the end of April. 

Renewi Plc dropped 1.9% to  575.0 pence after the waste-to-product company reported a decline in the fiscal year 2023 on higher costs and volatility in recyclate prices.