While investigators have been largely optimistic around a U.S. debt-ceiling resolution,, some caution is creeping in, as we are one week away from the June 1 “X-date”, when the U.S. Treasury may exhaust the extraordinary measures it has been employing since January.
Monday’s meeting between President Joseph Biden and House Speaker Kevin McCarthy led to productive talks and an agreement that default is off the table, but it ended without a deal.
And today House Republicans raised questions about the accuracy of the June 1 deadline.
Edward Jones analysts said they expect the debt-ceiling impasse will be resolved, but it ma come down to the wire, as it has in recent years.
Energy was the only S&P 500 sector up for the day, supported by a modest rise in oil prices.
Elsewhere, European stocks were also lower, dragged by a pullback in luxury-goods makers and uncertainty around the U.S. debt ceiling.
Bond yields reversed their morning strength and closed slightly lower while the U.S. dollar ended higher, adding to last week’s gains.
Some uncertainty surrounding prospects for a June rate hike has contributed to a rise in yields over the past week and the biggest pullback in investment-grade bonds since February.
Federal Reserve officials have shared mixed views on the need for further rate hikes.
Yesterday, Minneapolis Fed President Neel Kashkari mentioned in an interview that a June hike is a “close call”, while other officials have adopted a milder tone focusing on the lagged effects of the prior hikes.
Analysts said they think absent a big surprise in the next inflation and jobs data coming out before the June meeting, that the Fed is preparing to step on the sidelines, as hinted in the May meeting.
Investors will be focusing on the FOMC minutes released tomorrow for some further insight into Fed officials’ thinking.
Analysts said their view is that after having hiked rates aggressively from near-zero to slightly above 5 percent, monetary policy is now restrictive.
Given how Fed actions tend to filter through the economy with a lag, and based on the gradual improvement in inflation since last year’s peak, a wait-and-see approach to any further policy changes is warranted.
Yet, we don’t see the Fed cutting rates soon, but discussion of a pivot could emerge late in the year.
From a portfolio standpoint, we would view any further rise in yields as an opportunity to gradually increase bond duration (which would mean more interest-rate risk) ahead of a gradual shift in the Fed’s tightening campaign.
Lowe’s was the latest retailer to report earnings.
While the company exceeded analyst expectations for the quarter, it cut its full-year guidance due to slower sales in discretionary categories, a trend that was also highlighted by its largest competitor, Home Depot.
The headwind of high inflation appears to be weighing somewhat on consumer spending, but part of the slowdown in certain categories is also explained by the shift in spending patterns towards services.
More broadly, takeaways about the health of corporate profits have been largely positive.
The first-quarter earnings season is almost complete, as 95 percent of the S&P 500 companies have now reported.
About 77 percent of companies have exceeded consensus expectations, better than the 73 percent one-year average, as the profitability pressures were not as bad as feared.
Every S&P 500 sector beat sales and earnings growth estimates except for utilities.
Better revenue growth helped by resilient economic growth and pricing power, along with cost-control initiatives have helped companies exceed low expectations.
Profitability pressures are likely to persist in the quarters ahead as the economy decelerates, but the decline in analyst estimates over the past six months likely captures part of the anticipated slowdown this year.
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