Stock indexes are off to a fairly quiet start to the week with investors sticking close to the sidelines ahead of several key catalysts, including votes on the debt ceiling bill and critical US employment data.

On the debt ceiling front, the US House could vote on a compromise bill as soon as tonight and most Washington insiders believe the legislation has enough support to pass. Once it passes the House, the bill moves to the Senate where majority leader Chuck Schumer has told lawmakers to be prepared to vote on Friday or potentially over the weekend.

The deadline to avoid a potential US debt default is Monday, June 5. Bulls believe that getting the debt ceiling out of the way removes a big downside risk and could therefore help draw more money back into stocks. Bears however argue that the deal could bring more chaos to financial markets with the US Treasury expected to issue some $1 trillion worth of T-Bills once its borrowing power is restored by the debt ceiling package.

Basically, the deluge could potentially suck even more liquidity out of the financial system, in turn pushing up short-term lending rates. The result could be banks having even less cash to lend and higher borrowing costs for businesses and consumers, even without further rate hikes by the Fed.

It could also impact hedge funds and other big traders that rely heavily on borrowing, leading to less liquidity and higher volatility across financial markets.

Today, investors will be digesting the Fed's Beige Book as well as the Job Openings and Labor Turnover Survey (JOLTS). Economists expect the JOLTS report will show job openings declined slightly in April to 9.35 million from 9.59 million previously. There are also several Federal Reserve officials scheduled to speak today, including Fed Governor Phillip Jefferson who has been nominated to serve as Fed Vice Chair. Richmond Fed President Thomas Barkin said yesterday that he was looking for signs that consumer demand is cooling before he will be convinced that inflation has been defeated. While Barkin did acknowledged that the pace of price increases has slowed, he said inflation nonetheless remains too high. Barkin's comments follow data last week that showed inflation, consumer spending, and wages continued to rise in April.

Barkin also said the upcoming May Employment Report, due out Friday, will be critical to the Fed's next policy decision in mid-June.

Turning to earnings, Salesforce and CrowdStrike report results today.

Wall Street bulls are thinking inflation is almost dead and that Fed rate hikes have almost ended. This is despite the past couple of weeks where the odds of the Fed hiking at the June and July meetings have increased. Many inside the trade think the Fed might have one more rate hike up its sleeve coming at either the upcoming June or July FOMC meeting. After that, the trade is thinking the Fed will have to reverse course and actually cut rates in late-2023 or early-2024. That's putting some air behind the recent tech lead rally and allowing the bulls to project a better overall landscape.

Bears are pointing to the S&P 500 trading at 4,200 and a rich 24.3 p/e ratio and 19.4x forward earnings which is certainly no bargain. If you go back 10-years ago (2013) the S&P 500 was trading at around 1,500 and at 16x p/e ratio.

Bottom line, for the market to keep climbing higher, at least in my opinion, the bulls need to be right about lower interest rates ahead. If rates stay at this level or higher for longer bulls will eventually need to backpedal. If the economy and the consumer strong enough to avoid a recession? Is employment and wage growth still way too strong to allow inflation to subside? Still lots of unanswered questions...

Americans' Spending Hit a New High in April: Real personal spending, adjusted for inflation, hit another new record in April. Bulls are quick to argue that we’re definitely not in a recession with spending this strong and unemployment this low. Perhaps it will happen in the months ahead, but it's not happening at this point. The month's spending growth bested economists’ expectations, coming in +0.5% higher than in March. Bears argue that market consensus has been strongly tilted toward the Fed pausing its rate hikes when it meets in June, but perhaps not so much anymore. Source Axios

Memorial Day Air Travel Beats Pre-Covid Levels: Air travel over Memorial Day weekend convincingly beat pre-pandemic levels in a big sign that demand remains strong heading into the crucial summer season. The surging demand helped lift airline stocks early Monday, though the markets remain skeptical about the sector’s optimism. Close to 9.8 million passengers passed through U.S. airport checkpoints over the four-day Memorial Day weekend, Friday through Monday, the Transportation Security Administration said. That’s around +300,000 more than the same weekend in 2019. Friday was the busiest day since the pandemic ended, as 2.74 million travelers passed through airport gates. Whether demand will stay strong or not is a key question facing investors when it comes to airline stocks. While Memorial Day travel is clearly a good sign, it is still just one weekend and more data may be needed to rid investors of their skepticism about the major carriers’ full-year earnings guidance. Source Barrons

State Farm Pulls Out of California: The insurer says it will no longer accept homeowner insurance applications in the state due to “historic increases in construction costs outpacing inflation” and “rapidly growing catastrophe exposure” to extreme weather events such as wildfires, etc. This is big news because State Farm is the top home insurance firm in the state, with AIG also pulling policies last year. And it’s not just happening in California; some insurers pulled out of Louisiana and Florida last year due to hurricanes and other severe weather. Source Axios

Nvidia Briefly Joins Exclusive $1 Trillion Club: Nvidia is now the seventh American firm and ninth globally to have topped the trillion dollar mark at one point, joining Apple, Microsoft, Amazon, Google owner Alphabet, Facebook parent Meta Platforms, Tesla, Saudi Aramco, and PetroChina. Apple, Microsoft, and Aramco are now each worth more than $2 trillion while Meta, Tesla, and PetroChina are no longer in the trillion dollar club. Nvidia's value has tripled in less than eight months, reflecting the surge in interest in artificial intelligence following rapid advances in generative AI. Its shares closed +3% higher at $401.11 on Tuesday, just a hair's breadth away from the $1 trillion valuation mark after hitting that level in intraday trading. Nvidia's forward price-to-earnings multiple (P/E) is 47.23. The figure is significantly above that of peers Qualcomm and Intel and also tops the sector median of 18.09, according to Refinitiv data. Source Reuters

JPMorgan Builds Unit for World’s Richest Families in Wealth Bet: JPMorgan Chase & Co. has quietly built a global unit focused on catering to the ultra-wealthy and their investment firms as it looks to expand services to the world’s super-rich. Created just before the pandemic and led by JPMorgan veteran Andy Cohen, the business now includes about three dozen people in the US, Asia and Europe and works closely with the New York-based firm’s investment and private banks. The unit is called 23 Wall, a nod to the location of the bank’s former Manhattan headquarters opposite the New York Stock Exchange. It focuses on about 700 families worth more than $4.5 trillion, according to Cohen. Global banks are vying for a greater share of the wealth created in recent years, helping to drive fierce competition for the world’s biggest fortunes. JPMorgan’s private bank opened 40,000 new accounts in the past 10 weeks, and last year added about one new client a day with assets of $100 million or more. Source Bloomberg

China’s Fading Recovery Reveals Deeper Economic Struggles: As the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves. The property boom and government overinvestment that fueled growth for more than a decade have ended. Enormous debts are crippling households and local governments. Some families, worried about the future, are hoarding cash. Chinese leader Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West are stifling foreign investment. Economists say these worsening structural problems are hobbling China’s chances of extending the growth miracle that transformed it into a rival to the U.S. for global power and influence. Instead of expanding at +6% to +8% a year as was common in the past, China might soon be heading toward growth of +2% or +3%, some economists say. An aging population and shrinking workforce compound its difficulties. These problems are deepening when China’s appeal as a destination for foreign firms is waning, data show, as tensions rise with the U.S.-led West. Foreign direct investment into China tumbled -48% in 2022 compared with a year earlier, to $180 billion, according to Chinese data, while FDI as a share of China’s GDP has slipped to less than 2%, from more than double that a decade ago. Competition for investment with countries including India and Vietnam is also heating up as firms seek to diversify supply chains. Source WSJ

NYC Law Regulating AI in the Workplace to Take Effect in July: As the battle to regulate A.I. begins, some cities are moving forward with policies that’ll place parameters on use cases within the workplace. New York City is one of them. Some might be surprised to find that the city’s government passed a law as early as 2021 stipulating that employers using A.I.-enhanced tools in hiring and promotion decisions must make candidates aware. Employers must also give candidates the option to request and learn what personal data is collected and are required to hire independent auditors to review their A.I. tools once a year for potential bias. The law will go into effect in July, and violations will result in a fine. Much like the pay transparency bills that New York put into effect late last year, the A.I. law is expected to influence other states to take action. Illinois and Maryland have already enacted laws regulating A.I. in the workplace, and California, New Jersey, Vermont, and Washington, D.C., are in the process of doing the same. Source Fortune

Home Price Declines May Be Over: Steep competition in the housing market and low supply are heating up home prices again. Nationally, home prices in March were +0.7% higher than March 2022, S&P CoreLogic Case-Shiller Indices said Tuesday. “The modest increases in home prices we saw a month ago accelerated in March 2023,” said Craig J. Lazzara, managing director at S&P DJI, in a release. “Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end.” After seasonal adjustment, prices increased nationally +0.4% in March compared with February. Lazzara also noted that the price acceleration nationally was also apparent at a more granular level. Before seasonal adjustment, prices rose in all cities in the 20-city composite in March (versus in 12 in February), and price gains accelerated in all 20 between February and March. Source CNBC

How Russia Killed its Tech Industry: According to government figures, about 100,000 IT specialists left Russia in 2022, or some 10% of the tech workforce—a number that is likely an underestimate. Alongside those exits, more than 1,000 foreign firms curtailed their operations in the country, driven in part by the broadest sanctions ever to be imposed on a major economy. The tech workers who left everything behind to flee Russia warn that the country is well on its way to becoming a village: cut off from the global tech industry, research, funding, scientific exchanges, and critical components. But cracks in Russia’s tech industry started appearing well before the war. For more than a decade, the government has attempted to put Russia’s internet and its most powerful tech companies in a tight grip, threatening an industry that once promised to bring the country into the future. Experts MIT Technology Review spoke with say Russia’s war against Ukraine only accelerated the damage that was already being done. Source MIT Technology Review

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