HomeContributorsFundamental AnalysisUS Debt Theater: Final Act?

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, the US retail sales figures released yesterday were softer than expected. Even though, the monthly number showed a rebound after two months of negative print, the rebound was smaller than expected and the yearly print showed that the sales growth unexpectedly decelerated, printed a disappointing 1.6% growth, down from 2.4% a month earlier, and way below the 4.20% penciled in by analysts. Core retail sales excluding gas and cars rose more than expected, while industrial production printed a bigger advance in April. But the latest data will unlikely get the Fed officials to change their mind regarding the fact that the Fed’s next move should be a pause in tightening rather than a further rise.

Activity on Fed fund futures gives around 80% for a pause in June, and the pricing may be partially distorted by the US debt ceiling saga. The chances of a pause are closer to almost-certain.

The US 2-year yield rather spiked above the 4% mark and stays there. Even the long-term papers have a difficult time finding buyers. The 30-year yield for example spiked yesterday to the highest levels since the SVB collapse back in March. All that means that the US debt ceiling theater comes with a cost.

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.

Moving forward, all eyes are on Target and Walmart earnings. If they happen to be softer than expected, as well, we could maybe take it as a hint that US consumer spending, which has been so resilient this far, could finally be giving in to high inflation and deteriorating macroeconomic conditions. In this context, the spike in US credit card debt, to nearly $1 trillion, is a hint 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 IEA’s prediction that global oil demand will rise more than expected this year due to a record-high Chinese intake couldn’t give a positive spin to the market. IEA said that ‘the vast majority of the projected demand recovery is already in train’ despite the weak Chinese data, but in vain, investors remained focused on lower Chinese growth forecasts from big banks.

Last word about the det ceiling theater

Global risk sentiment for the next few days will be driven by the US debt ceiling theater. While the looming uncertainty makes the markets hard to navigate in the short run, there is a good chance that the drama comes to an end within the next few days. In this scenario, we shall see a relief rally across risk assets. And a relief rally could be further boosted by the fact that the market is extremely bearish right now – which means there is potential for a sizeable recovery despite rising recession odds and a gloomy economic outlook.

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