Indices flat on quiet news day, Regional Banks bounce back

Indices flat on quiet news day, Regional Banks bounce back

Today's focus on the debt ceiling talks combined with poor earnings to weigh on stocks this morning, with Regional Banks struggling to recover from an early sell-off. Inflation and deficit talks weigh heavy on market sentiment, with both being risks to a major sell-off (if a low probability.)

Inflation data could be tricky

Several key economic reports will impact Wall Street this week. We're scheduled to get April consumer price index data tomorrow morning, followed by producer price index data on Thursday morning, followed by consumer sentiment data on Friday. The Cleveland Fed's inflation model shows a resurgence of core inflation in April which threatens to linger into May.

The Fed may consider this inflation data reason enough to further boost interest rates this year, although tightening credit policies by regional banks may buy the Fed time to monitor the situation. Nonetheless, this week's reports will continue to leave the markets vulnerable to headline risk as we go through the week.

Deficit Standoff (again)

The US is in danger of default if a negotiated solution to raising the US debt ceiling doesn’t happen by the first week of June. Technically, we’ve already hit the debt ceiling, but the U.S. Treasury Department is doing creative accounting to buy us time until sometime around the first of June. President Biden and House Speaker Kevin McCarthy meet today to discuss the US debt ceiling. The House of Representatives has already passed a bill to raise the debt ceiling while restraining spending – the president calls this unacceptable. The president wants a clean increase in the debt ceiling with no restrictions or limitations – House Republicans call this unacceptable. The US Senate has been unable to pass any bill on raising the debt ceiling in the current round.

Last Minute Agreement (again), unless there isn’t …

Wall Street assumes that the Democrats, led by the president, and Republicans in the House will do what they always do regarding the debt ceiling – fight until the last minute before the limit is finally raised again, averting catastrophe until the next deadline.  However, there is a non-negligible risk though is that neither side gives way, and we hit the deadline.

For now, this is just a topic of conversation on Wall Street, but will take on increasing importance as we draw closer to June 1st. The more important narrative is that Washington fails to fix the deficit problem, and that reality will be on us in the next several years.  In the end, the debt ceiling will likely be raised, but that will not remove the longer-term problem of rapidly escalating debt with higher interest rates that is expected to swallow the federal budget over the next several years, leading to higher taxes, a suppressed economy, monetizing of our debt, the devaluation of our dollar and increasing inflation problems.

Markets weaker on weaker earninngs

• At the time of writing, the broad S&P 500, tech heavy NASDAQ and Russell 2000 indices recovered from early declines to be off by 0.3%, 0.5% and 0.2%
• The KBW Regional Bank Index opened down by 5% this morning but has since reclaimed these losses.
• The VIX, Wall Street’s fear index, was up marginally at 17.5
• The dollar index was up 0.3% at 101.4, with and Dollar/Sterling flat and Euro/Dollar down 0.4%
• Yields on 2- and 10-year Treasuries were basically unchanged at 4.02% and 3.52%, respectively

Gold holds above 2K mark, oil rallies further

• Gold prices maintained the 2K level, up 0.5% to $2,043 per ounce
• Crude oil prices continued to rally, 0.4% to $73.4 per barrel
• Grain and oilseed markets were mixed to lower. Corn is taking the biggest hit in that sector this morning, following another cancellation of previous purchases by China this morning.

Russia celebrated Victory Day today by bombarding Ukraine with missiles

• Geopolitical risks are getting hotter and could further impact commodity markets
• Russian President Putin addressed the crowd in Red Square by saying, “A real war has been unleashed against our homeland,” blaming the West for his invasion of Ukraine
• At least 25 missiles were fired primarily at Kyiv today, but Ukraine claims that it shot down 23 of them – no sense of victory for Putin
• Russia will continue to escalate the weapons that it uses to gain the victory that it thought it would have after a few days of fighting nearly 15 months ago
• On a related note, Russia blocked inspection of ships in the “safe corridor” for the past two days, raising more questions about whether the Ukraine grain initiative will be extended beyond its May 18 deadline

China cancels corn imports reflecting soft domestic demand

• Demand remains sluggish in China for a broad spectrum of commodities, suggesting a decline in demand for the products produced with those commodities
• Now China has cancelled the previous purchase of another 10.7 million bushels of US corn overnight, according to USDA
• China still has more than 100 million bushels of old-crop US corn on the books, but traders now wonder how much of that will also be cancelled in the days and weeks ahead
• China’s soybean imports slowed in April, but that was largely due to new policies requiring tougher inspections that slowed offloading of boats

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com