{"id":190718,"date":"2023-05-19T12:45:00","date_gmt":"2023-05-19T16:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=190718"},"modified":"2023-05-19T19:23:46","modified_gmt":"2023-05-19T23:23:46","slug":"negotiators-furiously-walk-out-of-congressional-debt-ceiling-meeting-may-19-2023","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/negotiators-furiously-walk-out-of-congressional-debt-ceiling-meeting-may-19-2023\/","title":{"rendered":"Negotiators Furiously Walk Out of Congressional Debt Ceiling Meeting: May. 19, 2023"},"content":{"rendered":"\n

Markets quickly sank this morning after Republican lawmakers stepped away from the negotiation table, with GOP Representative Garret Graves claiming the White House team was being unreasonable. During the past few days, perceived progress on negotiations over the thorny debt ceiling issue caused markets to rally despite considerable uncertainty about the passage of a bill that will pass both chambers of Congress if brought to a vote next week. Some House republicans led by the Freedom Caucus are reluctant to accept a deal that doesn\u2019t curb spending to their standards while some House democrats are opposed to shrinking funding for social services. Graves\u2019 comments this morning highlight the highly uncertain nature of negotiators reaching a deal. Meanwhile, the discrepancy between market participants and the Federal Reserve\u2019s monetary policy expectations are shrinking as the higher-for-longer interest rate mantra sinks in. <\/p>\n\n\n\n

Debt Ceiling Pessimism Grows<\/strong><\/h2>\n\n\n\n

Investors are reassessing the outlook for a resolution to the debt ceiling crisis following the comments from Graves this morning. While political parties in the past few days have expressed optimism about the government avoiding a default on debt, negotiators have little wiggle room as a failure by Congress to pass a debt agreement next week would make it unlikely that a deal could be reached prior to the estimated June 1 date at which the government will be unable to make debt payments. Despite optimistic comments, negotiators appear far apart in reaching a compromise. The conservative Republican Freedom Caucus urged House of Representatives Speaker Kevin McCarthy to break off negotiations if President Biden doesn\u2019t embrace significant cuts while various progressive Democratic leaders have spoken out against reforming social programs. Progressive Caucus Chair Pramila Jayapal of Washington has said many members of the group were alarmed when Biden suggested he might accept increasing the requirements for individuals to qualify for social services, such as food stamps and Medicaid.<\/p>\n\n\n\n

Fed Remains Disciplined<\/strong><\/h2>\n\n\n\n

Recent Fed speakers have shifted the markets\u2019 thinking on the rate hike path. While the likelihood of a 25-basis point (bp) hike at next month\u2019s meeting dropped after Fed Chairman Powell mentioned that tighter bank lending may help the Fed in its inflation battle, expectations of rate cuts have been pushed back from September to November. Expectations of persistent inflation and a tighter Fed have propped up the 2-year and 10-year Treasury yields to their highest levels since March, pressures that drove the regional banking sector into severe strain amidst three bank failures. As Chairman Powell recalled the hardships of inflation during the 1970s, he reaffirmed that the committee remains steadfast in achieving their two percent inflation goal.<\/p>\n\n\n\n

Markets Reverse on Debt Ceiling Pessimism<\/strong><\/h2>\n\n\n\n

Equities were rallying and reached fresh year-to-date highs until news of stalled talks on Capitol Hill encouraged selling. The S&P 500 Index reached 4212.91, its highest level all year until selling pressure emerged, it\u2019s now down 0.3%. Bond yields of one-year duration and longer were higher in the morning but pulled lower after Powell implied that tighter credit standards are going to constrain economic activity enough and do some of its work for the central bank. The 2-year Treasury yield and 10-year are roughly unchanged at 4.25% and 3.65%, after falling from their highest levels since March of 4.35% and 3.72% respectively. The 1-month Treasury yield ,meanwhile, is up 15 bps on higher risks of a U.S. default. The Dollar Index is taking a break from its recent rally as Powell\u2019s comments dropped odds for another 25-bp hike, its down 48 bps to 103.09. WTI crude oil was higher on debt ceiling optimism but receded following objections in Washington, its down 0.3% to $71.72 on the threat of recession resulting from continued disagreement.<\/p>\n\n\n\n

Consumers Weaken but Some Industries Hold Up<\/strong><\/h2>\n\n\n\n

Inflation is causing shoppers to be more budget conscious, but certain non-retail industries are experiencing growing demand, at least in certain sectors. These themes are illustrated by the following earnings reports:<\/p>\n\n\n\n