The debt ceiling talks in Washington look like they will come down to the wire. Aside from how baffling it seems that politicians would consider voluntarily defaulting on bonds, the situation is creating lots of uncertainty.
The decision tree gets complicated if there is no breakthrough. Do bond yields go up or down, or possibly both, in the form of a more steeply inverted yield curve? Do stocks tank or become a kind of haven? Does the Federal Reserve start cutting interest rates right away, or does it try to do something else to steady the ship? Would a collapse of talks even matter much if President Joe Biden just ignores the ceiling and issues more bonds, citing the 14th Amendment?
Looking at it pessimistically, the possibilities make you wonder if the best strategy at the moment is stuffing all your money under the mattress at home—the classic move of the extremely risk-averse investor. Sell in May and go away, the old stock market adage goes.
Generally speaking, that’s not a good idea. Pulling out of the market would mean missing out on any rally if the debt ceiling debate is resolved and things return to normal.
But, even putting aside the debt ceiling, the outlook doesn’t seem great. After the latest round of company results, it appears the earnings outlook for most is more or less flat the rest of the year. Reports from retailers such as Dollar Tree, Costco, and Lowe’s will tell us more this week, but an aggressive campaign of Fed hikes will dent earnings sooner or later. Talk of recession hasn’t gone away, even if its onset has been repeatedly delayed.
For now, staying on the sidelines feels tempting.
—Brian Swint
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Biden, McCarthy to Meet Again Today on Debt Ceiling
President Joe Biden and House Speaker Kevin McCarthy (R., Calif.) will meet again this afternoon to try to complete a deal to avoid a U.S. debt default after their aides meet again Sunday night to hammer out remaining issues, the White House said.
- On Sunday, the sides were still at loggerheads. McCarthy told reporters “we’re still apart,” while Biden said what the GOP has offered is “unacceptable.” Talks are focused on a 2024 budget year cap that could be central to resolving the impasse, the Associated Press reported.
- Republicans want to hold spending to 2022 levels, while the White House wants to keep 2024 spending at the level of the current 2023 budget year, the AP reported. The latest draft has spending caps for six years, the report said, adding that the White House wants a two-year deal.
- The U.S. officially reached its $31.4 trillion debt ceiling in January, and has been maneuvering to keep payments flowing since then. Treasury Secretary Janet Yellen told NBC’s Meet the Press on Sunday that there will be “hard choices” if an agreement isn’t reached by June 1.
- Yellen reaffirmed that date despite other estimates pushing the X-date further into June. She said even with a fresh influx of tax revenue in mid-June, odds of continuing to make payments through June 15 are “quite low.”
What’s Next: Rep. Chris Van Hollen (D., Md.) told ABC’s This Week that Democrats should move on to other options, including a so-called discharge petition, a way to bypass Republicans by going to a vote. “I think the markets are going to get shaky,” the longer there is no deal, he said.
—Janet H. Cho
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China Bans Some Micron Sales as Chip War Escalates
China’s Cyberspace Administration told companies involved in the country’s critical information systems to stop buying chips from U.S.-based
Micron Technology,
saying they pose a “major security risk,” without elaborating. The ban is needed to protect national security, the agency said on an English language version of its website.
-
China’s investigation into the largest American chip maker was seen as retaliation for the U.S. reducing China’s access to key technology. Analysts said Micron was an obvious first target for China, which can get chips from South Korea’s
Samsung
or
SK Hynix,
the Financial Times reported. - Mainland China and Hong Kong generated 25% of Micron’s $30.8 billion in 2022 revenue. China is investing in its own chip industry to reduce reliance on foreign manufacturers. The agency’s statement said it “promotes high-level opening up” to the outside world.
- China also is accelerating efforts to develop satellite-powered internet networks to compete with Elon Musk’s Starlink, which has maintained connections in war-torn Ukraine. New launch sites are being built in China, and state-owned and private satellite companies are expanding, The Wall Street Journal reported.
-
Private-sector companies planning satellite constellations include
Amazon.com,
Germany-based Rivada Space Networks, and London-based OneWeb. The U.S. Space Force is developing a network to support the military, and the European Union is creating one.
What’s Next: Micron CEO Sanjay Mehrotra attended the weekend’s Group of Seven summit in Japan, the FT reported. Micron said it was evaluating the agency’s conclusion and assessing its next steps.
—Janet H. Cho
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Nvidia
Ramps Up Supercomputer Chip Battle with Intel, AMD
Nvidia has said a new supercomputer based in the U.K. will run on its new brand of central-processing units. It’s an illustration of the chip maker’s push into CPUs, an area historically dominated by Intel and
Advanced Micro Devices.
- Nvidia said on Sunday the Isambard 3 supercomputer will run on 384 of its Grace CPU Superchips. The supercomputer will be built by Hewlett Packard Enterprise as part of a project being led by researchers at the University of Bristol.
- Nvidia shares have surged on the prominent role of its graphics-processing units, or GPUs, in training and applying artificial-intelligence technologies. Adding CPU chips to its lineup would make it an even more powerful player in the semiconductor market.
- Nvidia CEO Jensen Huang said last year the Grace Superchip was on track to be shipped in the first half of 2023 and would be used primarily for data centers.
What’s Next: While a university supercomputer is a flashy application of Nvidia’s CPU technology, the real test will be its adoption in corporate data centers. It will face a stiff test to win market share against the processors of Intel and AMD, which are backed up by decades of market relationships, so it could take several years to judge Nvidia’s CPU progress.
—Adam Clark
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Retailers’ Earnings to Highlight Consumer Spending Trends
Dollar Tree,
Costco Wholesale Corp.,
Best Buy,
and
Gap
are among the many retailers reporting earnings this week. The results could illuminate how lower and middle-income consumers are coping with rising prices, after other major retailers said higher grocery prices are hurting other spending.
-
Lowe’s,
BJ’s Wholesale Club,
Dick’s Sporting Goods,
and
Urban Outfitters,
all reporting Tuesday, will highlight consumer demand for clothing and other nonessentials. Discretionary sales have suffered as consumers are forced to spend more for food, MarketWatch reported. - Retailers that have already reported have talked about “shrink,” an industry term that refers to lost inventory, often due to theft. Target said shrink is about a $500 million headwind. Expect other companies to talk about such potential costs.
-
Consumers are bargain-hunting.
Walmart
is attracting new higher-income, and younger, consumers who are likely trading down to less-expensive options as their budgets are squeezed. - Still, anxiety about a possible recession is easing. A FactSet analysis of first-quarter earnings calls found the number of S&P 500 companies talking about recession dropped for the third straight quarter.
What’s Next: On Friday, the Bureau of Economic Analysis will report personal income and expenditures for April, both of which are expected to have risen from March. The Fed’s preferred inflation measure, called the core personal-consumption expenditures price index, is expected to slow to a gain of 4.4% from last year.
—Janet H. Cho and Teresa Rivas
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Gasoline Prices Sliding as Summer Driving Season Approaches
Demand for gasoline has been lackluster this year despite the drop in prices, and some experts see little chance of that changing. In addition, oil prices are weak because of slowing global demand, as high interest rates and other issues are weighing on economic growth.
- At around $3.50 a gallon, average national gas prices are $1 less than they were a year ago. A similar drop has happened only three times recently—during the 2009 recession, the 2015 OPEC supply glut, and after the onset of Covid-19 in 2020, according to GasBuddy’s Patrick De Haan.
- Gas prices have fluctuated between about $3.15 and $3.65 a gallon this year. That’s well below $5 a gallon or more last year, but people have not increased their driving much, wrote Tom Kloza, the global head of energy analysis at the Oil Price Information Service, in an email to Barron’s.
- Gasoline demand fell 4.2%, to 8.9 million barrels a day in the latest week, according to the Energy Information Administration. OPIS, owned by Barron’s parent company, estimates that prices could be down $1.25 to $1.50 a gallon by June from last year.
- The positions of oil traders such as hedge funds are near the most bearish levels they have seen since 2011, Bloomberg reported. So far this year, WTI crude futures are down 11%, while Brent crude, the international benchmark, is down 12%.
What’s Next: Goldman Sachs analysts forecast that a large gain in oil prices could unleash as much as $40 billion worth of buying in U.S. crude and Brent crude by commodity trading advisors, Bloomberg reported, citing a note to Goldman’s clients.
—Avi Salzman and Liz Moyer
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MarketWatch Wants to Hear From You
Once Washington reaches an agreement on raising the debt ceiling and President Joe Biden signs off on it, will a flood of Treasury issuance put pressure on the market?
A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to [email protected].
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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