Nasdaq 100 rebounds even as US debt is put on negative watch

The Nasdaq 100 rebounded this morning as traders become more optimistic on an agreement to raise the US debt ceiling, while Fitch became the first rating agency in this cycle to put US debt on negative watch in case it didn’t. Revised GDP data shows that the consumer spent more on goods and services in the first quarter than early reports, and today’s economic data also suggests the economy is gaining momentum and the job sector is still tight. Fed fund futures are now pricing in the likelihood of one to two more rate hikes this year, now becoming baked into market sentiment.

TODAY'S MAJOR NEWS

Fitch puts US debt on negative watch

Ratings agency Fitch stated yesterday that it put the US “AAA” rating on “negative watch,” due to the political risks associated with the debt ceiling talks, echoing a previous October 2013 watch by the agencies. Fitch gave the US a warning: “The brinkmanship over the debt ceiling, failure of US authorities to meaningfully tackle medium-term fiscal challenges … and a growing debt burden signal downside risks to US creditworthiness.”

Negotiators worked past midnight last night, seeking to reach a deal on the debt ceiling talks. We are down to the final week before Treasury Secretary Janet Yellen says that we will run out of options on the debt ceiling. Congress is set to leave town for the Memorial Day holiday break, but House Speaker Kevin McCarthy says he will tell his members that they should remain close enough to get back to town quickly for a vote when called.

The current debt ceiling is set at $31.4 trillion, although actual current US debt is currently estimated to be $31.8 trillion, enabled by accounting tricks to make payments. Revenue coming into the government on a daily basis should be enough to make debt payments without defaulting, but that might necessitate not making other payments, such as salaries of government workers, and/or social security payments, etc. There is no reason to have a default, but that is the threat hanging over the talks, and frankly nobody wants to see payments to workers or seniors held up either.

Bottom line – risk-on

Financial markets swung back to the risk-on camp today in the face of risks to US credit ratings and higher interest rates. Equity and debt markets continue to see-saw with each turn spurred by current events.

TODAY’S MAJOR MARKETS

Equity markets

• The S&P 500 and Nasdaq 100 rose by 0.7% and 1.7%, respectively this morning, while the more broadly based Russell 2000 was down 1.0% and the KBW Regional Bank Index was down by 1.7%
• The DAX and FTSE 100 and were off by 0.3% and 0.7%, respectively
• The VIX, Wall Street’s fear index, fell 3.9% to 19.3

Currencies and Bonds

• The dollar index was up 0.4% to 104.3 against a basket of currencies, a 10-week high, while Euro/Dollar and Dollar/Sterling were down 0.3% and 0.5%, respectively
• Yields on 2- and 10-year Treasuries were higher at 4.47% and 3.79%, with shorter-dated notes reflecting expectations that official rates could rise again

Commodities

• Gold prices again broke through support levels, down 1.0% at $1,944 per ounce
• Crude oil prices fell 3.6% to $71.7 per barrel, on profit taking, having touched $74.5 earlier this week
• Wheat prices continue to lead the complex lower amid a media focus on wheat imports
• Corn and soybean prices saw some short covering in recent days, supported by the current dry pattern across the Midwest

Q1 GDP estimates raised

• The second reading of first quarter gross domestic product came in at 1.3% growth, above the expected 1.1%, and up from 1.1% first reading (GDP data is often revised over time)
• Personal consumption expenditures grew at an annualized rate of 3.8% in the first quarter, above the expected 3.7%, and up from 3.7% in the first reading

Chicago Fed points to above trend regional growth

• The Chicago Fed national activity index for April came in at 0.07, indicating growth slightly above the normal trend during the month
• That rise comes despite a downward revision of the March number to -0.37, down from -0.19 originally
• The three-month moving average fell to -0.22 in April, reflecting sluggish growth overall during the past three months
• In other words, the economy was slowing in March, and over the past three months overall, but it picked up some momentum again in April.
• The index tracks broad economic activity and inflation factors, constructed to have a value of zero when the economy is growing at a trend pace, with a standard deviation of one

Unemployment claims still modest, no sign economy is slowing

• First-time claims for unemployment benefits rose to 229,00 in the week ending May 20, falling short of analyst expectations of 248,000
• The previous week’s number was revised to 225,00 claims, down from the 242,000 originally reported
• This puts the four-week moving average at 231,750 claims, unchanged from the previous week
• Continuing claims for the week ending May 13 fell another 5,00 to 1.794 million, a relatively low number from a historical perspective

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com