Can a default be averted? Stocks want to know ASAP

Stocks ended the week on a down note with economic numbers showing a decline in consumer confidence. More debt ceiling fears kept the bulls hiding out as policymakers failed to… make policy.

For sentimental reasons. There is no lack of things that go bump in the night for stock investors these days. It seems that we just can’t stay on track long enough for a nice, solid, systematic move. To be fair, given recent declines in sales and earnings growth, a massive, bursting at the seams rally seems unwarranted, but a nice, slow, and steady recovery after last year’s painful drawdown should have a chance, but for aforementioned, said bumps in the night. In other words, there are some positives that should be celebrated, but something always seems to pop up to prevent the celebration from kicking off.

Being that it’s Monday, let’s get our bearings before the week’s festivities begin. The best way to start is where we left off last week. The University of Michigan survey was bristling with negative economic news. Foremost, consumers are losing confidence. When that happens, those consumers stop doing what they do best… consume. The timely report showed a larger-than-expected decline in confidence for May. Big declines could be found in respondents’ Expected Business Conditions in 1 Year, Household Durables and Vehicle Buying Conditions, and Home Buying and Selling Conditions.  I am quite sure that none of that surprises you given nosebleed price gains in big ticket items and tightening credit conditions. The Fed should find the decline in confidence supportive of a pause in rate hiking. But unfortunately, the same report showed that respondents expect inflation to remain high for at least the next year and even beyond. The latest report showed that consumers expect inflation to be +3.2% in 5-10. That is higher than the Fed’s +2.0% target, last month’s print of +3.0%, and higher than analysts’ expectations of +2.9%. That should worry the Fed because if consumers expect inflation, they are likely to continue to accept it.

In other news, lawmakers closed out last week in what appeared to be a stalemate on discussions on the debt ceiling, and stocks are starting to notice the lack of progress. Well, to be fair, when Treasury Secretary and former Fed Chair Janet Yellen says it is a problem, everyone should pay attention… including the President and congressional leaders. Last week, Yellen took her warnings a step further by stating that if the debt ceiling was not modified soon, we “would have to default on something.” Yah, that should get someone’s attention, and it did.

Rate hike fears, at least according to the market, are firmly fading with the potential for any more hiking sitting around 16%, which is low probability. However, according to the markets, there is a high probability of rate cuts later this year. That would be good news if FOMC members have not been so crystal clear that rate cuts are not happening this year. That discrepancy in opinions will have to work itself out in coming weeks… and it will, don’t worry. Earnings season is winding down but there are still lots of big names to report over the next 2 weeks, in particular the retailers, which will take center stage this week. Adding to those retailers’ earnings releases, we will get a read of Retail Sales from the Census Bureau.Also, up this week are a slew of housing numbers which are expected to show continued declines in response to the Fed’s good work. Finally, the Conference Board will release its Leading Economic Index which is a broadly watched early warning sign of economic slowdown. That has been declining and it is expected to decline further in this upcoming release. Today, all eyes will be on the debt ceiling and there are reports that progress was made in discussions over the weekend helping stock index futures to start the day slightly higher. For the full economic release calendar (which I highlight for you) along with earnings releases (including analysts’ estimates and dial-in numbers) simply click on today’s attachments or links.

FRIDAY’S MARKETS

Stocks declined on Friday as debt ceiling fears increased in intensity. The S&P500 fell by -0.16%, the Dow Jones Industrial Average slipped by -0.3%, the Nasdaq Composite Index lost -0.35%, and the Russell 2000 Index fell by -0.22%. Bonds declined and 10-year Treasury Note yields added +7 basis points to 3.46%. Cryptos lost -0.49% and Bitcoin fell by -2.08%.

NEXT UP

• Empire Manufacturing (May) may have declined to -3.9 from 10.8.
• Fed Speakers: Bostic, Goolsbee, Kashkari, and Cook.
• The week ahead: More earnings, housing numbers, regional Fed reports, Retail Sales, Industrial Production, and Leading Economic Index. Check out the attached calendars for times and details.