The debt ceiling drama has passed and unfortunately the much needed spending cuts needed to stem the federal deficit (and inflation) are not going to happen. This leaves the Fed the only game in town to fight higher prices. The Fed Governors have been out on the speaking circuits recently and the message is that a pause is going to happen at the June 14th meeting. Why? The Fed needs time to assess the damage that happened in the banking sector and to see if the lagged effects of sharp rate increases begin to wash across the economy.
How bad is the damage? Certain areas like manufacturing and commercial real estate are in a recession but others like semiconductors continue to find green shoots with new areas such as Artificial Intelligence. We did get a strong jobs number on Friday despite a rising unemployment rate and wages did not accelerate so the stage is set for a pause for more than one meeting. The market will now be keyed into economic data and earnings reports as the Fed takes a backseat to leave the market to its own devices.
The Stock Market
The S&P ended the week on a positive tone and showed signs of breaking free of many weeks of a choppy and erratic trading range. As you can see below, there have been many rallies with sharp reversals over the last two years so this breakout needs follow-thru to the upside in the coming 1-2 weeks to build confidence in a sustained breakout. The August 2022 high ($432) is the next hurdle and will be stiff resistance and we may see that re-tested next week. Obviously, a failure to launch here would mean a sizable corrective move to the downside so the price action in June will be significant in determining the next larger move in this chart.
The Bond Market
The front end of the curve (blue line) is trading with a normal shape now that the Fed is on pause and the debt ceiling fears have abated. The tip of the curve is near 5.5% and implies the Fed will go another 25bps later this year and that 2024 is expected to have rate cuts.
Economic Data
- The Nonfarm Payrolls report on Friday showed an increase of 339,000 in May from April while previous months were revised up by 93,000. This was much better than expectaions. The private sector contributed a majority of the gains at 283k.
- The April JOLTS data (job openings) rose to 10.1mm from 9.75mm in March which implies pressure on wages as companies need workers.
- The May ISM manufacturing index fell slightly to 46.9 from 47.1 and marks the 7th straight month of contraction. Of the 18 industries surveyed, 4 saw growth and 14 remain in recessionary territory.
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President, Kisco Capital