Things you need to know.
- A deal got done – but is it?
- Expect lots of noise from the far right and far left – but there are enough in the middle to get this through congress. A vote is expected on Wednesday.
- The Senate expected to pass it and send it to Jo Jo by Sunday. D-day is Monday (or maybe not!)
- Markets rally – but was this already priced in?
- NVDA higher again…CEO Huang making an appearance in Taiwan.
- Try the Summer Pasta Salad
Stocks closed higher on Friday as we headed into the long Memorial Day Weekend — the Dow added 328 pts or 1%, the S&P up 54 pts or 1.3%, the Nasdaq added 277 pts or 2.2%, The Russell gained 18 pts or 1% while the Transports gained 13 pts or 0.1%. This as it was anticipated that Kevin McCarthy and the WH would come to a deal, and so, as expected they reached a ‘deal’ and announced it on Saturday night/Sunday morning…….All the outlets praising the hard work, Kevy & Jo Jo patting themselves on the back for a job well done… – the headlines said it all…..
“Biden, McCarthy Agree Final Details of Debt-Ceiling Deal”
Joey telling us that HE did not make any concessions…. Kevy – telling us that the spending cuts were ‘historic’ – Ok…. that about says it all, – One guy says he didn’t concede while the other side says – they got cuts beyond what they expected… Which means both sides are full of it….
The agreement would raise the limit for 2 yrs., it supposedly cuts spending on favorite Democratic priorities (yet it does not define which ones and by how much), boosts military spending by 3%, and does push for certain beneficiaries of federal aid (food stamps) to get a job, while also speeding up the permitting process for (fossil fuel) energy projects. Just to be clear – in the end they reached an ‘agreement in principle while keeping spending ‘largely in line with current levels! Current levels? They don’t even know what current levels will be – since we are only 5 months into 2023 and spending has gone up every month…so what happened to the idea that they were going to hold spending to 2022 levels? Exactly. An agreement in principle only means that the particulars (the meat and potatoes) get to be ‘negotiated’ at some date in the future….so what looks like a deal – was really only them kicking the can down the road (again) – but I have to ask -Did any of us really expect a sea change in the DC mindset? Hardly!
Now – Kevy put out the 100 page agreement onto the House website on Monday evening and that means that all of our elected officials have to read it and then take notes to decide if they will support or reject it on Wednesday…before they send it to the Senate for their ‘stamp of approval’ – assuming that they are going to ‘stamp it’. Joey urging all elected officials to vote to pass it – in order to avoid a ‘cataclysmic default’. On Sunday – Chicago Fed President Austan Goolsbee told Margaret Brennan on Face the Nation that we are at a ‘dangerous place’ and that the country needed to understand just what is at stake….
So, Austan – here is what is at stake – absolutely nothing. No default was ever going to happen, Janet suddenly found an extra 5 days – putting the X date at June 5th – this after she hammered home that June 1st was the X date….that’s it, no more money for you….No SS payments, no debt payments nothing, zippo….Nada Remember – the last time this happened – August 2011 – The FED and the Treasury had ‘privately formalized a plan to make on-time payments on Treasury debt while delaying other gov’t bills IF no deal had been reached…(this according to transcripts of those meetings at that time – Benny Bernanke was FED Chair while Timmy Geithner was Treasury Chair).
But now – Janet tells us that the Treasury’s systems WERE NOT designed to give payment priority to bondholders (thus there can be NO plan to override it – which is BS) and that a failure to pay ANY obligation is ‘effectively a default’. So, there she goes – changing the definition of a default. What she is saying is that shutting the gov’t down and furloughing gov’t employees (not paying them) is now considered a default! Well, if that’s true then we have defaulted lots of time in the past 40 yrs….. The 21-day shutdown in 1995-95 (Clinton), the 16-day shutdown in 2013 (Obama), the 35-day shutdown in 2018-19 (Trump)… It’s ridiculous….
Look – there is plenty of time, we were never ‘on the edge of default’ ever….and so this continued ‘hysterical talk’ is completely unwarranted…. So, please stop the histrionics. And the hysteria over SS and Medicaid – yeah, that was just hysteria….to drive the sentiment….
Minority Leader Hakeem Jeffries can’t get enough of himself by telling us every time he gets in front of a camera that it is the ‘MAGA Republicans’ that want to destroy the country by asking able bodied 19 – 55 yr. olds to get a job if they want to continue to receive food stamps and federal aid….Now to be clear – This is only for single – able bodied 19-55 yr. olds…with no children to care for….to which I have to say to Mr. Jeffries – stop with the inflammatory language, rise up above the partisan noise and lead – otherwise get out of the way. The inflammatory commentary from BOTH sides is ridiculous and if you haven’t figured it out yet, the country is tiring of it.
In any event – expect the markets to begin to settle down – (US futures are higher at 5 am)….that is though, after it decides what the deal really is….Last week I told you that whatever it is – the markets – controlled by algo’s, investors and traders will decide what they think about all the drama. Are they happy with what we got or is it just more of the same? My gut says that nothing will really change and that in the end – all the negotiations did was create drama, angst, and trepidation…. the ceiling will get raised and we will spend more money than even we estimate today…. And then we will have to issue more bonds to cover the expense…. And that is exactly what it looks like happened….We will get more details today and tomorrow – expect to hear some pushback – just because – and then I suspect that the final vote gets pushed to 11 pm on Sunday June 4th….That is unless Janet finds another week in her little ‘bag of goodies’ if she senses that they won’t make it by then. Let’s see – our friends at Goldy had an X date somewhere between the 8th and 15th….and on the 15th – Janet will get a bunch of checks in the mail to be deposited into the treasury and BAMMM – she just bought MORE time…. Whatever….
Eco data today isn’t that exciting…it’s all about the house price index across 20 US cities… we will also get the Consumer Confidence report – the expectation is for 99 – down from 101.3…Along with the Dallas Fed Survey…. of -18. Later in the week – we will get the ADP employment number on Wednesday and that is expected to show 165k new jobs…the FED’s Beige Book, the Dallas FED survey, Mortgage Apps, and Challenger Job Cuts…..Thursday brings us S&P Manufacturing PMI of 48.5 (contractionary), ISM Manufacturing PMI of 47 (again contractionary) and then on Friday – we will get the May NFP (Non-Farm Payroll) report and that is expected to show 190k new jobs….the Unemployment rate is expected to tick up to 3.5% (up from 3.4%) but still well below what many economists say it has to go to (think 5+%), Average hourly earnings m/m of +0.3%, and y/y of +4.4%.
US futures this morning is higher on a knee jerk (relief) reaction…. – Dow futures are up 75 pts, the S&P is up 20 pts, Nasdaq is up 140 pts, (There is another Nvidia story out) while the Russell is ahead by 6 pts. Nvidia CEO Jensen Huang speaking at a COMPUTEX conference in Taiwan telling us that ‘Everyone is now a programmer’ thanks to generative artificial intelligence…. this as the world enters a ‘new computing era …all you have to do is say something to the computer….’ NVDA is quoted up another 13 points (3%) this morning at $402/$402.50 taking its YTD performance to +170%….
Treasury yields are falling across the whole curve on the back of ‘the deal’. The short dated 1-month bill – which was yielding more than 6% last week is yielding 5.12% this morning….as the risk of default subsides…. the 3 month is yielding 5.06%, 6 month – 5.10% while the 2 yr. is at 4.53%, and the 10 yr. is yielding 3.74%. I would expect to see them fall further as the deal comes together…. IF it comes together.
Oil rose on Friday – up 1.5% or $1/barrel….On Monday – it rose again – gaining another 0.5% or 37 cts…to end the day at $73.04…..below the trendline resistance at $74.80…This morning – oil is on sale….falling $1.40 or 1.9% as we get more information about the debt deal….the weakness in oil is being tied directly to the headlines saying that the deal ‘averts a default in the world’s largest economy’ (which is an oxymoron isn’t it? Is the world’s largest economy ever going to default on its debt?)….But, the headlines still leave it in question – as it called the deal ‘provisional’ – suggesting that while it exists in the present – it will most likely be changed later….but in the end – the market is assuming a deal got done…..And while oil is trading lower – investors/traders and algo’s will still try to handicap OPEC+’s next move on June 4th keeping in mind that $80/barrel is the Saudi sweet spot….….…. Remember the conflicting messages out of the group – The Saudi’s saying, ‘watch out’ (threatening more production cuts) while the Russians say, ‘not so fast.’
In addition, a stronger dollar is helping to hold the line on oil – with the DXY trading up 15 cts. at $104.35. The dollar index is now up 3.25% since the May low and that has kept the oil in a tight range. Remember – any thought that the FED will raise rates will strengthen the dollar and that will keep pressure on oil – unless of course- OPEC+ announces a production cut.
Gold – which has been a bit psychotic of late is all over the place……on Friday it traded as low as $1955/oz and as high as $1975/oz. to end the day at $1964/oz….On Monday it closed at $1961/oz….This morning it is trading right there…..leaving us solidly in the $1880 (long term support) and $2000 range…..Last week I said that we would not see a break either way until we get clarity on the debt talks as well as clarity on the FED’s next move and it appears that we are getting both….a done deal (although not the one that we expected) and a more aggressive FED . Remember too, a stronger dollar will be a negative for gold and other commodities.
European markets are mixed…. Spanish PM Pedro Sanchez is now calling for a snap election on July 23 after his ruling party ‘suffered heavy losses in regional elections over the weekend’. And in Turkey – Erdogan has once again been re-elected President….as noted on my Twitter – did anyone expect anything different? Even if he lost – he was going to win…. Come on! At 5:30 we see the UK and France a bit lower down 0.2% while Germany, Spain and Italy are all up by 0.5%.
The S&P closed at 4205 – up 54 pts. And if futures are any indication – it looks like we might test 4225 ish…. The extent of any move will be determined by WHAT the deal actually is…. What kind of spending cuts will we get and will the Senate pass this onto Joey’s desk? In the end – it is now about ‘execution risk’ and already we have some on the far right and the far left that are bitching about the deal, but they have enough moderate republicans & democrats on board to mute any pushback by those groups, So, I like many expect this deal to get through the Senate and passed to Jo Jo’s desk before the 5th…..But I guess – anything could happen. For now, we are in the 4100/4225 trading range.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace Capital Advisors.”
Summer Tortellini Salad w/Sundried Tomatoes and Artichokes
For this you need: 1 lb. of frozen cheese tortellini, fresh mozzarella balls, ½ c sliced kalamata olives, 2 cans of drained artichoke hearts, 1 jar of sun-dried tomatoes -sliced into strips (save the oil for the dressing) and chopped parsley.
Boil the pasta in a pot of salted water – when done – drain and set aside – always reserving a mug of the pasta water to keep it moist until you are ready to use it.
For the dressing you need: ¼ c of red wine vinegar, fresh lemon juice, ¾ c of the sun-dried tomato oil, 2 tsp of Dijon mustard, ¼ pecorino Romano cheese, 2 tsp dried oregano, 2 chopped/smashed garlic cloves, s&p and crushed red pepper flakes are optional.
Combine all the dressing ingredients in a food processor, blend until emulsified. Set it aside.
In a large bowl – combine the tortellini, tomatoes, artichokes, sliced mozz, olives, and parsley. Add enough of the dressing to season it – mix it well and taste? Do you need more dressing? If so, add, if not – then not. You can serve as is or put it in the fridge and serve later. You can eat this room temp or right out of the fridge.
Buon Appetito
