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Home / Education / Fundamental Analysis / Investors are Keeping an Eye on Bearish Inflation News Despite the Debt Ceiling Debate That Is Still Going On

Investors are Keeping an Eye on Bearish Inflation News Despite the Debt Ceiling Debate That Is Still Going On

2023-05-26  Uziel Udayle

(Friday market open) We are getting closer and closer to the so-called "X-date" of June 1, which is the potential date on which the government will not have enough money to pay its payments. On Wall Street, the consensus opinion is that a deal will be struck to prevent a default on the debt. A report from Reuters stated that on Thursday, congressional leaders and President Joe Biden made progress in their negotiations, and that the parties involved now just need to reach an agreement on spending amounts totaling $70 billion. Naturally, Congress would still need to approve any arrangement before it could go into effect.

It's possible that a lot of people will want to get a head start on the long holiday weekend today, which could result in a less active market this afternoon. Those who are still actively engaged with their screens may want to think about lowering the size of their trades in light of the uncertainty around the debt ceiling and other risk considerations. A thin market might create the conditions for dramatic market swings.

This morning's primary focus in the world of economics is on the topic of inflation. The rise in prices for personal consumption expenditures (PCE) in April was 0.4%, which was slightly higher than the 0.3% increase that economists had anticipated. The prices of the core PCE basket, which exclude the costs of food and energy, also increased by 0.4%. After the statistics were posted an hour before the market opened, major stock indices and bond prices went down marginally.

 

The morning frenzy


  • After the release of the PCE statistics, the yield on the 10-year Treasury note increased to 3.83% from 3.79% earlier in the morning. This represents a change of 2 basis points.
  • The value of the U.S. Dollar Index, often known as the DXY, decreased to 103.91.
     
  • At the moment, the price of the Cboe Volatility Index® (VIX) futures is 18.76.
     

The price of a barrel of WTI Crude Oil (/CL) increased little to $72.48.


Just in


The Personal Consumption Expenditures (PCE) prices data, which is highly followed by the Federal Reserve, could signal that inflation continues to be stubbornly hotter than expected, which could spark further concerns over potential rate hikes in the approaching Federal Open Market Committee (FOMC) meetings. The Core PCE has now increased by 4.7% year on year. Every one of the first four months of 2023 had month-over-month growth of 0.3% or more, with no discernible indication of a slowdown in the rate of expansion.

Another piece of data that was released this morning shows that there are few indications of an economic downturn. In April, personal spending grew 0.8%, which was significantly higher than the 0.4% increase that was anticipated on Wall Street. This may be a reflection of increasing costs for products and services, but it does not mean that consumers are cutting back on their spending. This is somewhat perplexing in light of the fact that numerous shops have recently reported that customers are being cautious and avoiding making discretionary purchases.

 

A Look at Some Notable Stocks


After Nvidia (NASDAQ:NVDA) earnings spurred excitement regarding artificial intelligence (AI), Wall Street celebrated an honorary "chip day" yesterday. The PHLX semiconductor index (SOX) recorded its greatest single day since February, making yesterday the chip day's strongest single day since February. The current market value of Nvidia is getting close to reaching $1 trillion. That is a level that has previously been reached by just a select few firms, such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Alphabet (NASDAQ:GOOGL).

According to Bloomberg, Nvidia anticipates revenue of $11 billion for the current quarter, which compares to the earlier forecasts of $7.2 billion that were provided by analysts. The euphoria surrounding Nvidia rubbed off on stocks of Nvidia's competitors, including Advanced Micro Devices (NASDAQ:AMD), as well as stocks of companies that supply chips. Since reaching its low point in October of last year, the SOX has seen an incredible increase of 60%. In comparison, the S&P 500® index (SPX) has only increased by 19% over the same time period.

Speaking of which, the Standard & Poor's 500 Index experienced a healthy recovery late on Wednesday and Thursday after coming dangerously close to the 50-day moving average during Wednesday's low point. The 50-day moving average is currently located slightly below 4,100, and this area could be a zone to monitor for possible support on any sell-off that may be spurred by the uncertainty around the debt ceiling before the holiday weekend. The fact that Thursday's close was higher than the previous barrier of 4,150 could perhaps generate some technical support.

With 96% of companies in the S&P 500 having reported their results, both the average profits per share (EPS) and revenue growth have significantly surpassed forecasts. In addition, the total amount of the average "beat" was more than it had been in any of the preceding four quarters. This would indicate that analysts may have set their expectations for earnings too low moving into the first quarter of the year when it comes to earnings season.

The question now is whether or not that might also be true for current earnings predictions for Q2; however, how the fight over raising the debt ceiling plays out could have an effect on the about one-third of the quarter that is still to come.

When there is a surge like this one, it is tempting to jump in on the action in the chip industry. However, as is the case with any trade, investors may want to make sure that they have a thorough understanding of the semiconductor company and the risks associated with it before purchasing any shares. Because of a rise of 60% since October, present valuations are considered to be fairly high, which is another risk aspect to take into consideration.

 

Watch out for the central bank!


According to the CME FedWatch tool, the probability of a pause being taken by the Fed at their meeting in June currently stands at 59% as of this morning. That is a tad less than what was recorded the day before, but we won't know how the market reacts until we see the PCE inflation data released this morning. The algorithm continued to point to a 58% probability of a pause even after the data had been publicised for about ten minutes.

 

What Should You Watch


Checking in with consumers: We will shortly after today's open get a glimpse at the final number for the University of Michigan Consumer Sentiment Survey for the month of May. According to Briefing.com, analysts anticipate that it will continue to be as weak as it was earlier this month, and the consensus for a headline result is currently at 57.8. Weak sentiment frequently contributes to lower consumer expenditure, which is a feature that is detrimental to the economy. Be sure to keep an eye on one-year inflation forecasts, which fell to 4.5% at the beginning of May, down from 4.6% in April.

Looking ahead: Following the holiday on Monday, next week will have a few noteworthy data points, the most important of which will be the report on nonfarm payrolls for the month of May, which will be released on Friday. Before that, though, on Thursday there will be the release of the May ISM Manufacturing Index. This is a study that has revealed output levels to be faltering for the past several months. Since October of last year, there has not been a single month in which it has not been below 50 for a headline statistic. This indicates that the economy is contracting. The Flash Manufacturing PMI data that was released earlier this week by S&P Global was lacklustre, with a headline score of 48.5 in May, down from 50.2 in April. According to S&P Global, there was a paucity of new orders, which hampered growth. Employment in manufacturing, which expanded as firms had better luck finding suitable individuals, is a piece of the puzzle that is interesting and adds to the whole picture. For manufacturers, it appeared as though the inflation picture was getting better. Is there a glimmer of hope at the end of this ordeal?

related link: The Gold Standard: What Is It? Benefits, Remedies, and History

 

hiring manager: We are getting closer and closer to the so-called "X-date" of June 1, which is the potential date on which the government will not have enough money to pay its payments.: The Job Openings and Labour Turnover Survey (JOLTS) report for May is another important piece of data that will be released the following week. It is scheduled to be released on Wednesday morning after the market opens. In recent times, this labour market has been a little bit of an anomaly because it has shown a downward tendency in the number of openings for several months. However, they reached an all-time high of 9.59 million in March, which is approximately a fifty percent increase from the average pre-pandemic level.

In spite of yesterday's surge on Wall Street, the number of equities with a dropping price still outnumbered those with an increasing price by around a 2:1 ratio. The information technology industry increased by more than 4%, while no other sector gained even 1% of its value. As concerns over the debt ceiling persist, it would appear that investors are gravitating almost exclusively towards large-cap technology equities.

A primer on the debt ceiling: A default does not appear to be likely, but market volatility could increase as a result of investor nervousness over the discussion in Washington, D.C. Check this page for the most recent responses from Schwab to your questions regarding the debt ceiling.

earnings and guidance
 

AI Applause is today's chart of the day. The entire semiconductor sector (SOX—candlestick) skyrocketed higher on Thursday to the highest level since the beginning of April 2022, thanks to the blowout profits and forecast that Nvidia reported. As interest in artificial intelligence (AI) grows, the SOX index keeps trading well above its 200-day moving average (blue line), and it is also now performing better than the Nasdaq 100 (NDX) year to date. Data source: Nasdaq.The thinkorswim® platform was used to generate the chart. This is merely meant to serve as an example. Past performance does not guarantee future results.


Consideration hat
Ideas to keep in mind while you are trading or investing.

Debt perspective: Yesterday, Fitch Ratings made news when it put on negative watch the United States' AAA long-term foreign-currency issuer default rating. This caused a lot of concern among investors. It is not the first time that rating agencies have expressed concern regarding the credit of the United States. After a drawn-out debate over raising the United States' debt ceiling in 2011, S&P Global Ratings downgraded the United States' long-term credit rating from Triple A to AA+. What kind of repercussions did that have for the financial markets? Regarding the amount of money spent on interest, not a lot. At the end of July 2011, just prior to the ratings cut that S&P implemented on August 5, the benchmark yield on a 10-year Treasury note was 2.95 percent. After some erratic trading during the autumn of 2011, the yield on the 10-year bond fell down below 2% towards the end of the year. However, a solution was reached, and plans are now in place to decrease future federal expenditure by $2 trillion. This brought an end to the debt ceiling problem. There is no one who can predict how the current one will turn out.

Watch out for the recession: The increase in the government's estimate for first quarter gross domestic product (GDP) growth from 1.1% to 1.3%, while better than the prior estimate of 1.1%, nevertheless reflects relatively anaemic growth and is the lowest it has been since the second quarter of last year. It is difficult to get overly enthused about this minor upward adjustment. Ironically, this weakening comes alongside a historically robust labour market, which currently boasts unemployment rates that are at or below historic lows of 3.5%. Despite this, practically every major retailer in the United States that has reported their earnings in the past two weeks has stated that customers are being cautious and avoiding making significant discretionary purchases. Is it possible that we are already experiencing a "stealth" recession as a result of this? Typically, by the time economists notice a recession, it will already be at least partially in the rear-view mirror. Keep a watch on the May ISM Manufacturing Index when it is released the following week for more hints. It has been weak for a number of months. Another indicator that the economy is entering a recession is the upcoming release of the Beige Book by the Federal Reserve on the following Wednesday. The Beige Book contains ground-level observations of economic activity from regional Fed economists.

That will set you back one dollar: As concerns over the debt ceiling have grown, the U.S. dollar index has recently risen to nearly three-month highs above 104, which has led many analysts to speculate that this could signal investors are looking for a "safe haven" in the greenback. However, there is another way to look at dollar strength, and that is as a reflection of the fact that investors are typically not interested in other things. For example, the recent increase in the value of the dollar was accompanied by a decline in the price of Treasuries. As the yields on U.S. Treasury notes increase (moving in the opposite direction of the notes themselves), demand for the dollar increases in comparison to other currencies. Additionally, the rise in the value of the dollar was accompanied by a decline in stock prices, which are among the assets that carry the highest level of risk. However, if the United States were to default on its debts, it is possible that the value of the dollar would decline. However, based on its current strength, investors do not appear to be counting on that.
 


2023-05-26  Uziel Udayle