Investors are on edge as US lawmakers struggle to strike a deal to raise the debt ceiling and avoid a potential default. President Biden and House Speaker Kevin McCarthy are set to meet today after negotiations this weekend reportedly failed to overcome some major sticking points.

The Treasury has pegged June 1, which is next Thursday, as the deadline for when the US will run out of cash to pay its bills. One of the risks in pushing the debt ceiling fight up to deadline is the potential for a downgraded US credit rating as happened in 2011. That year, a bill to raise the ceiling was signed just hours before the Treasury was set to run out of money but Standard & Poor’s still downgraded the US credit rating by one notch three days later. Their reasoning was that "political brinkmanship" had made America's governance and policymaking "less stable, less effective, and less predictable than what we previously believed." For what it's worth, Standard & Poor's never restored America's AAA rating, leaving it at AA+ ever since. The national debt is more than double what it was in 2011 ($31 trillion today vs $15 trillion in 2011).

In 2011, interest payments on all US debt totaled $425 billion. In the first quarter of 2023, those payments hit $929 billion on an annualized basis. A second downgrade to US credit could effectively balloon those payments even higher and threaten the "safe haven" status of US Treasuries.

The ratings downgrade in 2011 also led to a -7% drop in the S&P 500, capping a -15% drop that occurred during a month-long battle in Washington.

Year to date, the Nasdaq is up more than +20%, the S&P 500 has risen more than +9%, and the Dow is just barely in positive territory. All three made gains last week but that was also under the assumption that a debt ceiling deal was close to being cemented. Optimism on Wall Street in general is shaky as the US economic outlook and future Federal Reserve direction remain uncertain.

Many still expect a recession later this year which could be compounded by high interest rates that the Fed may or may not be finished raising. Fed officials last week delivered mixed opinions, though most seemed inclined to pause rate hikes at the upcoming June meeting. That means a lot is riding on key data between now and the next meeting as any indications that inflation is again accelerating will likely dash hopes for a June pause.

With the Fed's benchmark rate already above 5% and banks curtailing lending, many on Wall Street believe turning the screws any tighter would all but guarantee a hard downturn by the end of the year. However, if inflation is still running much above the Fed's +2% target rate, the Fed is unlikely to come riding to the rescue with its typical rate cutting maneuvers.

The April PCE Prices Index on Friday and the May Consumer Price Index on June 13 are the important inflation reports to watch, along with the May Employment report next Friday, June 2.

Investors are also anxious to see the preliminary reads on ISM Manufacturing and Services Indexes due out tomorrow, both of which will provide previews of how wholesale prices have been trending this month. Wednesday brings the "minutes" from the Fed's previous policy meeting which could shed more light on how most members are leaning on the rate hike debate.

Earnings this week will bring another round of retail results, providing more details on the health of consumers. Results from companies like Home Depot and Walmart last week indicated that consumers are growing more cautious and looking to spend less but executives were still generally optimistic that consumers are hanging in there.

The problem for many traders, including myself, is that the stock market is back to where it was last summer but interest rates are much higher, regional banks have shown significant weakness, and corporate earnings and forecasts aren't nearly as good. We are also seeing more people being laid off and inflation is still somewhat hot despite the Fed's aggressiveness. In other words, bears believe the trade is currently pricing the market to perfection for the next six to twelve months. Bulls believe interest rates are going lower and corporate earnings are going to start improving. I worry that any slight slip by big tech and the market slides lower. It will be interesting to see how long the hype surrounding AI and the ChatGTP-type headlines can continue to pull new money off the sideline... stay tuned!

Exxon Drilling for More than Just Oil: Exxon Mobil XOM 0.46%increase; green up pointing triangle is bracing for a future far less dependent on gasoline by drilling for something other than oil: lithium. The Texas oil giant recently purchased drilling rights to a sizable chunk of Arkansas land from which it aims to produce the mineral, a key ingredient in batteries for electric cars, cellphones and laptops, according to people familiar with the matter. Exxon bought 120,000 gross acres in the Smackover formation of southern Arkansas from an exploration company called Galvanic Energy, according to some of the people. The price tag was more than $100 million, people familiar with the matter said. Source Wsj

Mexico Raises Alert Level on Volcano Rumbling Near Capital: Mexico City's two main airports temporarily shut down operations on Saturday due to ash spewing from Popocatepetl volcano, located 45 miles (72 kilometers) southeast of the country's capital. The city's Benito Juarez International airport suspended operations at 4:25 a.m. local time. It resumed operations at 10 a.m., after removing volcanic ashes, checking the runways and verifying favorable wind conditions, the airport said on Twitter. The new Felipe Angeles airport, located north of Mexico City and operated by the military, shut down operations around 6 a.m., and service was suspended for five hours. Volcanic ashes are especially dangerous for aviation, not only because they reduce visibility but because they can act as an abrasive, damaging an aircraft's wings and fuselage. The Popocatepetl rumbled to life again last week, belching out towering clouds of ash that forced 11 villages to cancel school sessions. Source ABC

G-7 Leaders Agree to Set Up ‘Hiroshima Process’ to Govern AI: Leaders of the Group of Seven countries agreed on the need for governance in accordance with G-7 values in the field of generative AI, expressing concern about the disruptive potential of rapidly expanding technologies. In what they are calling the “Hiroshima Process,” the governments are set to hold cabinet-level discussions on the issue and present the results by the end of the year, the leaders said in a statement at the G-7 summit on Friday. The fear is that the advancements — which can produce authoritative and human-sounding text, and generate images and videos — if allowed to progress unchecked, could be a powerful tool for disinformation and political disruption. Sam Altman, chief executive officer of OpenAI, along with International Business Machine Corp.’s privacy chief, called on US senators last week to regulate AI more heavily. Separately, the World Health Organization said in a statement this week that adopting AI too quickly ran the risk of medical errors, possibly eroding trust in the technology and delaying its adoption. Source Bloomberg

Fannie Mae Warns Housing Downturn Will Spark a "Mild" U.S. Recession: The housing market recession isn’t over just yet—and it could regain momentum as the market moves into the seasonally slower summer and fall months. At least that’s according to a revised forecast just put out by Fannie Mae. Through the first quarter of 2023, U.S. housing market activity as measured by private residential fixed investment (i.e. the core of housing GDP) has declined, on a nominal basis, for four straight quarters. Fannie Mae expects residential fixed investment to fall in Q2 2023 (-5.9%), Q3 2023 (-9.1%), Q4 2023 (-6.4%), and Q1 2024 (-1%). “There is a record number of multifamily units currently under construction, which are scheduled to come online later this year and into 2024. Combined with tightening credit for construction lending, which we expect will soon be realized by a slower new project pipeline, we are expecting a significant slowdown in starts later this year,” wrote Fannie Mae economists in their report published on Friday. The pullback on the multifamily side, according to the Fannie Mae forecast, will negate any economic boosts created on the single-family side, which has benefited this spring from builder incentives like mortgage rate buydowns. Fannie Mae’s forecast model thinks declines in the U.S. housing market will spill over and help to push the U.S. economy into a recession. At the same time, Fannie Mae economists also believe that the U.S. housing market will be a buffer against a deep recession. Source Fortune

Cars Under $20,000 Getting Harder to Find, Even Used: First, the under-$20,000 new car died — now, the under-$20,000 used vehicle is disappearing. 30.6% of used vehicles were sold for less than $20,000 in the first quarter, down from 60.5% in the first quarter of 2018, according to car-research site Edmunds. Even the average 7-year-old vehicle with 75,000 miles still sells for more than $20,000. More-expensive new vehicles translates into more-expensive used vehicles. And less than 1% of new vehicles were sold for less than $20,000 in the first quarter of 2023, according to Edmunds. The pandemic supercharged new-vehicle prices as supply chain bottlenecks cratered production while demand spiked. Meanwhile, cheap passenger cars have fallen out of favor as SUVs and pickups — which are more expensive for consumers and more profitable for auto companies — have become more popular. Used car prices surged 4.5% from March to April, according to the latest Consumer Price Index figures, and were "the main driver of core goods inflation," Bank of America economist Michael Gapen wrote in a research note. Other signs point to prices finally coming down a little. The average used vehicle price in the first quarter was $28,381, down -6.4% from a year earlier, according to Edmunds. Source Axios

We have alternatives that are low in correlation to traditional stock & bond portfolios. They are liquid and transparent. Minimums and fee structures vary and some are performance based only. Returns we can share are NET of Fees.

If you want to learn more, just let me know what works to learn more about your needs.

Schedule A Call Now

Futures trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results. Futures trading is not suitable for all investors.

Nell Sloane, Capital Trading Group, LLLP is not affiliated with nor do they endorse, sponsor, or recommend any product or service advertised herein, unless otherwise specifically noted.

CTG Daily Commentary is published by Capital Trading Group, LLLP and Nell Sloane is the editor of this publication. The information contained herein was taken from financial information sources deemed to be reliable and accurate at the time it was published, but changes in the marketplace may cause this information to become out dated and obsolete.

It should be noted that Capital Trading Group, LLLP nor Nell Sloane has verified the completeness of the information contained herein. Statements of opinion and recommendations, will be introduced as such, and generally reflect the judgment and opinions of Nell Sloane, these opinions may change at any time without written notice, and Capital Trading Group, LLLP assumes no duty or responsibility to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice.

Any references to products offered by Capital Trading Group, LLLP are not a solicitation for any investment. Readers are urged to contact your account representative for more information about the unique risks associated with futures trading and we encourage you to review all disclosures before making any decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Nell Sloane, Capital Trading Group, LLP and their officers, directors, and/or employees may or may not have investments in markets or programs mentioned herein.