May 10, 2023
Good morning,
The CPI (Consumer Price Index) takes center stage this morning (8:30 am ET), and while it remains the key inflation data point, there is not quite the same importance today as it has been through much of the tightening cycle (15 mo.). Last week, the Fed indicated that the bar has risen to justify further rate hikes. Near term data will be less important than the figures released just before the summer meetings ahead (June 13-14 and July 25-26).
Headline: *US APRIL CONSUMER PRICES INCREASE 0.4% M/M; EST. 0.4%. April CPI was in line with expectations. The immediate “machine reaction” (program trading) in Futures is a jump in price by +.30%. I have no idea why. Every sub-element of CPI was as expected with no surprises. The market acts like it wants to go higher and we’ve covered the various possible technical reasons why in recent Morning Notes.
With last week’s Fed decision past, the market’s new focus is the Debt ceiling impasse quickly coming around June 1 (according to the U.S. Treasury Department). Market participants have been conditioned over the years to expect any debt ceiling impasse to be resolved in time to avoid a default, even if it comes down to the wire. Congress has always adjusted the debt ceiling, even if the Treasury has run on fumes for a while, using “extraordinary measures” to hold the debt under the statutory limit. It is a kick-the-can strategy, and while volatility often rises around the X-day, it does get resolved.
Given that the June 1 X-date is fast approaching, the time for proper negotiations is limited. But since history suggests that the debt standoff will likely be resolved, the highest probability outcome is for a temporary debt ceiling suspension either for a brief period of time or until September, when Congress will be debating the budget for the next fiscal year. The government has done this repeatedly, including seven times between 2013 and 2019. This would eliminate the risk of default around the current X-date, although it may push it until later in the year if debt negotiations stall.
Be well,
Mike