Should markets worry about the US debt ceiling?

• Corporate Earning News
• Key data to move markets this week  
• Global market indices  
• Fixed Income
• Commodity sector news  
• ​Global macro updates   

Corporate Earnings News

The big banks benefitted. What emerged from the short lived banking crisis threat in March was that the biggest lenders continued to benefit from both an increase in deposits as savers fled smaller, regional banks and as the Fed’s rate hikes pushed up revenue from their lending operations. As noted by Bloomberg news, JPMorgan Chase & Co. saw first-quarter net interest income jump 49% and it boosted its forecast for such revenue to $81 billion this year from its January forecast of $73 billion. At Wells Fargo & Co., net interest income surged 45%, and at Citigroup 23%, compared with a year earlier.

How healthy is the health sector? The health sector is having a bit of a mixed earning season response thus far. Shares of Elevance Health fell 5.3% after the insurer's strong quarterly profit was unable to ease investor concerns over regulatory hits to the company's government-backed insurance business. However, medical device makers are doing well with Abbott Laboratories shares rising 7.8% after the medical device maker said most delayed non-urgent medical procedures had resumed globally three years after the Covid-19 pandemic. Intuitive Surgical shares also surged, rising 10.9% after its quarterly revenue and profit topped estimates.

Corporate earning calendar 20 - 27 April 2023

Thursday: American Express Company, AT&T, Blackstone, Philip Morris International, Snap Inc., Union Pacific Corporation, Marsh & McLennan, Fifth Third Bancorp
Friday: Procter & Gamble, Schlumberger, Freeport McMoran, Regions Financial Corporation 
Monday: Activision Blizzard, Coca-Cola Company, First Republic Bank, Cadence Design Systems, Ameriprise Financial Corporation, Brown & Brown, Packaging Corporation of AmericaTuesday: Alphabet, Microsoft, 3M Company, General Electric, General Motors, Halliburton, McDonald's Corp., Pepsico, Spotify Technology, Verizon Communications, Illumina, Visa Inc., UBS, Novartis, Danaher, UPS, Texas Instruments, NextEra Energy, Chubb Ltd., Fiserv, Sherwin-Williams, Moody's Corporation, Edwards Lifesciences, Kimberly-Clark Corporation, Archer-Daniels-Midland, Centene, Biogen, Enphase Energy 
Wednesday: Automatic Data Processing (ADP), Boeing, CME Group, Meta Platforms, QuantumScape, Roku, ServiceNow, Thermo Fisher Scientific, Pioneer Natural Resources, C.H. Robinson Worldwide, eBay Inc., American Water Works, Hess Corporation, Teledyne Technologies
Thursday: Abbvie, Amazon, Amgen, AstraZeneca, Bristol-Myers Squibb, Caterpillar, Eli Lilly and Company, Gilead Sciences, Mastercard, Merck & Co., Intel Corporation, Mondelez International, Pinterest, Snap Inc., T-Mobile, Sanofi, Honeywell, Northrop Grumman, Kaurig Dr Pepper, Valero Energy, Newcrest Mining, Arthur J. Gallagher & Co., Xcel Energy, Capital One Financial Corporation, Republic Services, FirstEnergy Corporation, Church & Dwight, Hartford Financial Services Group

Key data to move markets this week

EUROPE 

Thursday: German PPI, ECB Monetary Policy Meeting Accounts, Eurozone Consumer Confidence, and a speech by ECB Executive Board member Isabel Schnabel.
Friday: German S&P Global/BME Composite, Manufacturing, and Services PMIs, Eurozone S&P Global Composite, Manufacturing, and Services PMIs, a speech by ECB Vice President Luis De Guindos and a speech by ECB Executive Board member Frank Elderson.
Monday: German IFO Business Climate, Current Assessment and Expectations surveys.
Wednesday: German GfK Consumer Confidence.
Thursday: Eurozone Business Climate and Economic Sentiment surveys.

UK

Thursday: GfK Consumer Confidence.
Friday: Retail Sales and S&P Global/CIPS Composite, Manufacturing and Services PMIs.

US

Thursday: Initial jobless claims, Continuing jobless claims, Philadelphia Fed Manufacturing survey, and speeches by Fed Board of Governors member Christopher Waller, Philadelphia Fed President Patrick Harker, Cleveland Fed President Loretta Mester, Atlanta Fed President Raphael Bostic, Fed Board of Governors member Michelle Bowman, and Dallas Fed President Lorie Logan.
Friday: S&P Global Composite, Manufacturing, and Services PMIs.
Monday: Chicago Fed National Activity Index.
Tuesday: Housing Price Index, S&P/Case-Shiller Housing Price Indices, Consumer Confidence, New Home Sales.
Wednesday: Durable Goods Orders, Nondefense Capital Goods Orders.
Thursday: GDP, Core Personal Consumption Expenditures, Personal Consumption Expenditures Prices, Initial Jobless Claims, Continuing Jobless Claims, and Pending Home Sales. 

US Stock Indices 

Nasdaq 100 -0.71% MTD and +19.63% YTD
Dow Jones Industrial Average +2.11% MTD and +2.50% YTD 
NYSE +1.81% MTD and +3.09% YTD 
S&P 500 +1.11% MTD and +8.21% YTD

Mega caps were mixed this week: Alphabet, Microsoft, Meta Platforms and Tesla were all down this week. Amazon and Apple were up. Apple opened its first two stores in India this week, raising hopes that its 5% market share in India could soon surge. India is set to become the world’s most populous nation by the middle of this year, surpassing China, according to data released by the United Nations. According to the New York Times, the iPhone 13 is the best-selling model in the premium segment, which includes phones that cost above 30,000 rupees, or $365. Last year, only 11% of the market was considered premium, but it was the fastest-growing segment.

Tesla posted its lowest quarterly gross margin in two years. The company reported at 19.3%, missing market estimates. It had slashed prices six times this year in an attempt to remain competitive. CEO Elon Musk said Tesla could sacrifice its industry-leading margins to drive volume growth during a recession and keep pace with rising competition in China. "It's better to shift a large number of cars at lower margin and harvest that margin in the future as we perfect autonomy," Musk told analysts on a conference call. He said although the economy remains uncertain, the EV maker's orders exceed production. For the first quarter, Tesla did not report automotive gross margin. 

Energy stocks were down this week as the USD gained ground on rate hike expectations, causing oil prices to fall to their lowest in about three weeks. Energy Fuels, Apa Corp (US), Chevron, Marathon Petroleum, Occidental Petroleum, Hess Corporation, Diamondback Energy and ConocoPhillips were all down. Energy service companies Halliburton and Baker Hughes were both up this week. 

On Wednesday Baker Hughes said it beat first-quarter profit estimates as rising oil prices boosted demand for its equipment and services, sending the oilfield firm's shares higher.

Materials and Mining stocks were mixed again this week as copper and zinc prices fell on uncertainty over further US rate hikes and a sluggish recovery of demand in China with Sibanye Stillwater, Yara International, and Nucor Corporation up, CF Industries Holdings, Mosaic, Newmont Mining, Dow Chemical, Freeport-McMoran, and Albemarle Corporation were down.

European Stock Indices 

Stoxx 600 +2.25% MTD and +10.18% YTD 
DAX +1.70% MTD and +14.16% YTD 
CAC 40 +3.10% MTD and +16.62% YTD 
IBEX 35 +2.84% MTD and +15.38% YTD 
FTSE MIB +3.02% MTD and +17.83% YTD
FTSE 100 +3.50% MTD and +6.00% YTD 

Other Global Stock Indices 

MSCI World Index +1.34% MTD and +8.27% YTD
Hang Seng -0.16% MTD and +2.96% YTD

Currencies

The USD firmed this week after five straight weeks of declines on growing expectations of another rate hike in May of 25 basis points. The GBP is +2.79% YTD against the USD, falling slightly due to the concern that its double digit inflation will harm an already fragile economy that had flat growth last quarter. Although BoE rate rises have been supportive, the impact of high prices on households and businesses is starting to erode purchasing power. The EUR is +2.35% YTD. 

Bitcoin +2.81% MTD and +76.08% YTD
Ethereum +8.58% MTD and +64.72% YTD

Note: As of 6:15 pm EDT 20 April 2023 

Fixed Income

US 10-year Treasuries at 3.60%.
German 10-year Bunds at 2.52%.
UK 10-year Gilts at 3.86%.

After falling in March as investors flocked to safe haven bonds, US yields are now moving higher as the banking sector seems to have stabilised and economic data points to a still relatively strong economy. In addition, Fed officials are still talking about the need to keep hiking rates in order to bring down inflation. According to Refinitiv, Fed funds futures traders are pricing in a 90% probability the Fed will hike rates by an additional 25 basis points (bps) at its May meeting with the odds of further 25 bps increase in June rising. 

Commodities

Gold futures to $2,006.80 an ounce.
Silver futures to $25.27 per ounce.
West Texas Intermediate crude to $79.16 a barrel.
Brent crude to $83.12 a barrel.

Global Macro Updates

Debt debates causing market jitters. As the Fed is highly likely to raise rates to its highest level in over a decade in May and could possibly seek to raise yet again in June, the US debt ceiling issue is re-emerging as a worry for investors. The US Treasury has said it would run out of money to pay the bills by June. Although debt ceiling disagreements have gone to the wire before, notably in 2011 and 2013, this time around it is happening in a much higher interest rate environment within the US and globally. Without an increase or suspension of the ceiling, the US would default on payment obligations as soon as June, something US Treasury Secretary Janet Yellen has warned would cause economic and financial “collapse.” Spreads on US five-year credit default swaps (CDS) have widened to 49 basis points, according to data from S&P Global Market Intelligence, more than double the level they stood at in January. According to Refinitiv, Goldman Sachs analysts said weak tax collections so far in April indicate a higher probability that the so-called "X-date," when the government is no longer able to pay all its bills, would be reached in the first half of June. Analysts at Citi said they expected a short-term deal in June or July. The nonpartisan Congressional Budget Office (CBO) has forecast that it would come sometime between July and September. The Treasury Department has warned the federal government that it could come as early as 5 June and has set this as the deadline for Congress to extend the debt limit or risk default for the first time in US history.

On Wednesday House Speaker Kevin McCarthy, a Republican, introduced a plan, called the Limit, Save, Grow Act, which aims to raise the debt limit by $1.5 trillion or through 31 March, 2024, whichever comes first. The McCarthy plan would bring discretionary spending back to 2022 levels, implying a $130 billion cut. Future increases would be capped at a 1% annual rate for the following decade. The bill is expected to get a floor vote next week. But, as noted by The Hill, with just a four-vote majority, McCarthy will have to work to ensure it reaches majority support. The Democrats are likely to stop the bill given that it wants to take back unspent Covid-19 relief funds, repeal the Biden administration’s investments in the Internal Revenue Service, scrap some green subsidies, end the student loan forgiveness programme, and reinstate work requirements for welfare recipients. Even if McCarthy’s bill were to pass the House, the Senate Majority Leader Chuck Schumer, a Democrat, has said it’s dead on arrival in the Democratic-controlled Senate, telling reporters Tuesday that a “clean debt ceiling is the way to go.” 

Europe’s underlying problem. Although Eurozone inflation eased in March to 6.9% from February’s 8.5%, mainly due to the drop in gas prices, underlying inflation remains stubbornly high. The annual core inflation rate accelerated for a fourth consecutive month to a record high of 5.7% in March of 2023 from 5.6% in February. European Central Bank (ECB) chief economist Philip Lane said that, if the baseline scenario underlying the March ECB's staff macroeconomic projections persists, it would be appropriate to raise rates further. Markets are now fully pricing in a 25 basis point rate hike for the May meeting, with around a 40% chance of a 50 basis point increase in June.

The UK’s never ending inflation battle. Britain’s inflation rate fell less than expected and remained in double digits at 10.1% in March from February’s 10.4%. This means that UK price growth is significantly higher than that of the Eurozone’s 6.9% and more than double the US rate, which dropped to 5% in March. Although headline inflation is still on track to continue to fall by the end of the year in line with targets, stubbornly high core inflation remains a problem, making it more likely that the Bank of England (BoE) will increase interest rates in May and may need to consider further moves thereafter. The BoE may be starting to worry that ongoing high headline inflation is changing wage expectations and business pricing strategies. Britain’s inflation problem is, in part, due to the reliance on gas and the misaligned energy support structures that were put in place to assist households and businesses. According to Reuters, British consumer energy prices were 79% higher in March than their level two years earlier, the biggest increase in western Europe. According to the Financial Times, energy currently contributes 3.5% to the 10.1% inflation figure, and this is set to disappear by the end of the year. The first big fall in inflation is expected in next month’s data, with the headline rate predicted to decrease by around 2 percentage points in a single month. However, the problems in terms of core inflation are being exacerbated by the post-pandemic reduction in the labour force combined with lower labour availability and the terms of trade shock that stems from Brexit.     

Europe’s crypto agreement. The EU’s Markets in Crypto Assets, or MiCA, regulation was approved by lawmakers on Thursday in a 517-38 vote. It makes Europe the first major jurisdiction in the world to introduce comprehensive crypto laws. The European Parliament also voted 529-29 in favour of a separate law known as the Transfer of Funds regulation, which requires crypto operators to identify their customers in a bid to halt money laundering. The text, according to the European Parliament, aims to ensure that crypto transfers, as is the case with any other financial operation, can always be traced and suspicious transactions blocked. The so-called “travel rule,” already used in traditional finance, will in future cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer.

The law would also cover transactions above €1,000 from so-called self-hosted wallets (a crypto-asset wallet address of a private user) when they interact with hosted wallets managed by crypto-assets service providers. The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.

European Financial Services Commissioner Mairead McGuinness said on Wednesday that she expects the legislation to come into force in July after it’s formally approved by the bloc’s 27 member states. Specific requirements will take effect progressively, with rules governing stablecoins, for example, set to apply from July 2024.

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