Debt Ceiling Showdown: How Looming Uncertainties Threaten to Derail Market Optimism
Conditions Remain Problematic
With a number of economic signals already flashing warnings, the debt ceiling fight in Congress is starting to get the spotlight. Investors, who may have anticipated they didn’t really need to worry about it until later this summer, may need to start considering the possibility of a technical default as early as June. The markets did have a bit more of a risk-off feel to them during the latter half of the week - utilities outperforming, Treasuries gaining and lumber retreating - but it wasn’t a big shift in sentiment. The risk signals are still mixed and aren’t indicating conclusively that conditions are firmly in the risk-off camp.
In terms of data, we got more information telling us pretty much what we already know. The global manufacturing recession continues to get a little deeper, while the services sector of the economy is helping keep everything above water. This is probably masking some of the weakness we’re seeing in housing specifically where rental rates are finally beginning to drop year over year, home prices are declining and even the slowing rate of new home construction has been enough to even out what’s still an imbalance between supply & demand.
The start of the earnings season has been mostly good, but remember that companies are largely beating lower expectations. While we’ve seen individual stocks rallying due to their results, the broader earnings picture hasn’t inspired much of a broader move in equities. Perhaps the biggest beneficiary of the earnings season is the VIX, which remains depressed and near 15-month lows. Sometimes, calm is all you need.
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