US Debt Theater: Final Act?

Risk sentiment remains poor as the US couldn’t reached an agreement on its debt ceiling.

But House Speaker McCarthy hinted that an agreement is possible within days. Despite both sides being far apart, everyone knows the catastrophic consequences of an eventual US default, and no one is ready to push the US into that black hole.

Yesterday, both equities and bonds were sold off on US debt ceiling impasse, while the US dollar index remained capped at two-week highs.

On the data front, U.S. retail sales released yesterday were weaker than expected. Although the monthly numbers showed a rebound after two months of negative results, it was less than expected, and the annual numbers showed that sales growth unexpectedly slowed, falling to a disappointing 1.6% from 2.4% the previous month and well below the 4.20% forecast by analysts. Core retail sales excluding gas and autos rose more than expected, while industrial production posted a larger increase in April. However, the latest data is unlikely to persuade Fed officials to change their view that the Fed’s next move should be a pause in tightening rather than another hike.

Activity in Fed funds futures suggests a pause in June at about 80%, though pricing may be partly skewed by the U.S. debt ceiling saga. The odds of a pause are closer to almost certain.

The 2-year U.S. yield has climbed above the 4% level and is holding there. Long-term paper is also struggling to find buyers. The 30-year yield, for example, rose yesterday to its highest level since the SVB collapse in March. All of this means that the fuss over the U.S. debt ceiling has come at a price.

Home Depot disappoints

Latest quarterly results from Home Depot were less than enchanting. Home Depot posted its worst revenue miss in about 20 years and lowered its forecast for this year. Its CFO said that this year will be the year of moderation for the company.

Home Depot finished yesterday’s session more than 2% down.

Going forward, all eyes will be on Target and Walmart earnings. If these, too, turn out weaker than expected, we could take this as an indication that U.S. consumer spending, so resilient until now, may eventually give way to high inflation and deteriorating macroeconomic conditions. In this context, the rise in U.S. credit card debt to nearly $1 trillion is an indication that trouble may be brewing.

Crude Oil under pressure

The weak Chinese data from earlier this week, combined to German pessimism and a 3.7 mio barrel build in US inventories kept crude oil under decent selling pressure.

Even the IEA’s prediction that global oil demand will rise more than expected this year due to record Chinese oil consumption failed to positively impact the market. The IEA said that ‘the vast majority of the projected demand recovery is already underway,’ despite weak Chinese data, but investors focused in vain on lower Chinese growth forecasts from major banks.

Last word about the det ceiling theater

Global risk sentiment will be driven by the U.S. debt ceiling theater in the coming days. While the looming uncertainty makes markets confused in the short term, there is a good chance that the drama will come to an end in the next few days. In this scenario, we will see a relief rally in risk assets. This relief could be exacerbated by the fact that the market is extremely bearish at the moment, meaning that there is potential for a significant rally despite the rising probability of recession and a gloomy economic outlook.