May 25 – Stock futures were mixed to higher this morning on reported progress in the debt ceiling talks, along with better-than-expected economic data released this morning. The VIX pushed to near 20 overnight, but it is now trading below 19 as traders monitor those debt ceiling talks. The dollar index is trading at a nearly 10-week high near 104.2 at this hour, with yields on 10-year Treasuries trading near 3.76% and yields on 2-year Treasuries trading near 4.46% as people exit the market on fears over the debt talks. Crude oil prices are 2% lower in early trade, while the grain and oilseed sector is mostly lower as well.
Negotiators worked past midnight last night, seeking to reach a deal on the debt ceiling talks. The current debt ceiling is set at $31.4 trillion, although actual current U.S. debt is currently estimated to be $31.8 trillion, managed by a series of accounting tricks to make payments. Revenue coming into the government on a daily basis should be enough to make debt payments without defaulting, but that might necessitate not making other payments, such as salaries of government workers, and/or social security payments, etc. There is no reason to have a default, but that is the threat hanging over the talks, and frankly nobody wants to see payments to workers or seniors held up either. Nonetheless, we are down to the final week before Treasury Secretary Janet Yellen says that we will run out of options. Congress is set to leave town for the Memorial Day holiday break, but House Speaker Kevin McCarthy says he will tell his members that they should remain close enough to get back to town quickly for a vote when called. Ratings agency Fitch stated yesterday that it put the United States “AAA” rating on “negative watch,” due to the political risks associated with the debt ceiling talks. It previously also put us on watch in October 2013. Fitch’s statement on Wednesday stated, “The brinkmanship over the debt ceiling, failure of U.S. authorities to meaningfully tackle medium-term fiscal challenges … and a growing debt burden signal downside risks to U.S. creditworthiness.” USdebtclock.org projects that our national debt will total $42.8 trillion four years from today if we remain on the current path, with the annual interest obligation totaling $1.7 trillion.
The second reading of first quarter gross domestic product came in at 1.3% growth, up from 1.1% in the first reading, and above analyst expectations of 1.1%. Personal consumption expenditures grew at an annualized rate of 3.8% in the first quarter, up from 3.7% in the first reading and above analyst expectations of 3.7%. Today’s data shows that the consumer spent more on goods and services than first thought in the first quarter, and that resulted in a bit more growth in the economy than first thought, although 1.3% growth is still not impressive by any means.
The Chicago Fed national activity index is a monthly index that tracks broad economic activity and inflation factors, constructed to have a value of zero when the economy is growing at a trend pace, with a standard deviation of one. The index for April came in at 0.07, indicating growth slightly above the normal trend during the month. That rise comes despite a downward revision of the March number to -0.37, down from -0.19 originally. The three-month moving average fell to -0.22 in April, reflecting sluggish growth overall during the past three months. In other words, the economy was slowing in March, and over the past three months overall, but it picked up some momentum again in April.
First-time claims for unemployment benefits rose to 229K in the week ending May 20, falling short of analyst expectations of 248K. Furthermore, the previous week’s number was revised to 225K claims, down from the 242K originally reported. This puts the four-week moving average at 231.75K claims, unchanged from the previous week. Continuing claims for the week ending May 13 fell another 5K to 1.794 million, which continues to be a relatively low number from a historical perspective. These numbers fit with the Chicago Fed national activity index data above, suggesting that the economy is gaining some momentum, which is keeping the job sector tight, supporting ongoing wage inflation. This provides another reason why the Fed is considering the possibility of additional rate hikes. Fed fund futures are now pricing in the likelihood of one to two more rate hikes this year.
Wheat prices continue to lead the grain and oilseed sector to the downside amid a media focus on wheat imports that have been in the works for quite some time, but they reflect reality, nonetheless. Corn and soybean prices saw some short covering in recent days, supported by the current dry pattern across the Midwest that forecasters think will break by the second week of June, but farmers remain nervous regardless. Export demand remains very soft, with the exception of soymeal demand that is starting to pick up amid the short crop in Argentina. The earliest of the corn fields have been harvested in Mato Grosso, revealing a big safrinha crop in Brazil, although it will be another 30 days before we see meaningful supplies start to reach the ports. Rallies continue to be sold in the broader commodity sector. The crude oil market should provide us our first indications of a shift in fund sentiment toward the broader commodity sector, indicating more optimism about the economy and about demand.
