May 26 - Stocks pushed higher today ahead of the three-day holiday weekend on hopes and expectations that negotiators are close to a deal to avert a debt crisis. That optimism was overshadowed by data showing a greater need for central bank monetary tightening, but the debt crisis optimism continues to be the dominant factor at this hour. The VIX slipped back below 18 on the debt negotiation optimism, while the dollar continues to be strong along with Treasury yields. The dollar index is currently trading at a 10-week high 104.4, while yields on 10-year Treasuries are trading at an 11-week high near 3.84%, and 2-year Treasuries are at an 11-week high near 4.62% as money exits the Treasury market ahead of the weekend, and on rising expectations of more rate hikes by the Federal Reserve. Fed fund futures trading now prices in 63% odds of another rate hike at the Fed's June meeting, up from 17% a week ago. Crude oil prices are 1% higher at midday, while the grain and oilseed markets are mostly higher as well, with traders adding weather risk premium back to the markets ahead of the three-day holiday weekend amid dry Midwest forecasts for the next two weeks.
The deadline for raising the U.S. debt ceiling is just days away, with the Treasury Department warning that it could run out of cash on or shortly after June 1st. However, media reports indicate that the White House and House Republicans may be on the cusp of an agreement that would raise the debt ceiling for an estimated two years, while capping spending for non-defense discretionary spending at current-year levels. That would in theory eliminate the risk of another showdown until after the 2024 presidential election. The White House is reportedly considering Republican demands to scale back its plans to significantly boost IRS spending to hire thousands of tax auditors as well. Republicans are reportedly holding strong against corporate tax increases in the deal, whereas the White House is holding strong against work requirements for social assistance. A deal is not yet inked, but there is a sense of optimism at this hour. The challenge would be for each side to convince enough members of their separate parties to vote for the agreement, with both parties holding very narrow margins over their respective houses. Regardless, the risk of a Fitch credit downgrade still remains on the table, at least to some degree. The current debt limit sits at $31.4 trillion, although actual obligations are currently near $31.8 trillion and rising. The national debt prior to the pandemic was $23.2 trillion. This year's anticipated interest cost for that debt is $573 billion, and rapidly rising as maturing debt certificates are rolled at today's higher rates. That interest cost obligation is projected to be $1.7 trillion just four years from now if we do nothing to change our current trajectory. That would have significant implications for both the U.S. economy, as well as for the markets, with everything likely coming to a head in Washington within the next two years.
The consumer sentiment index came in at 59.2 in May, according to the University of Michigan. That's up from the preliminary reading of 57.7, and up from analyst expectations of 58.0. The April index was 63.5, whereas it was 58.4 a year ago. The current conditions index fell to 64.9, down from 68.2 in April, but up from 63.3 a year ago. The index of consumer expectations fell to 55.4, down from 60.5 in April, but slightly above the 55.2 posted a year ago. This month's decline was largely due to worries about the path of the economy as the nation headed into a potential debt ceiling crisis. This month's decline mirrored the one seen in 2011 during those contentious debt ceiling talks. The biggest drop in sentiment this month came from those with middle incomes, and those in the West. However, most consumers felt better about their own finances. Year-ahead inflation expectations slipped to 4.2%, down from 4.6% in April. However, long-term inflation expectations firmed for the second month in a row, but remained within the narrow 2.9 - 3.1% range that has contained them for 21 of the past 22 months.
