Debt Ceiling Takes Center Stage

Debt Ceiling Takes Center Stage

• The week opens with higher yields as investors are feeling more confident that a debt ceiling deal will be had, as President Biden voiced optimism that a deal could be reached. We think one will be reached too, but just not this week (more on that below). Anyway, that bit of optimism has Treasuries on the backfoot in early trading.  Currently, the 10yr is back to that familiar 3.50% level while the 2yr is yielding 4.00%.

• This week is light on economic data so trading will focus on any hints of progress in the debt ceiling negotiations. Fed speak will figure prominently as well as the give and take on whether the Fed pauses next month will be weighed, and if the pause eventually leads to a pivot. Reports are that McCarthy and Biden will meet tomorrow at the White House to continue talks, while rumors are that staff are making progress in the background while the political players do their posturing. We still think, with a couple weeks remaining until the earliest x-date estimates hit in early June, that an actual agreement will be a late May event and probably nothing of substance this week.

• Although economic data is light, the key release will be tomorrow’s April Retail Sales Report. Expectations are for sales to rebound nicely from the slump late in the first quarter. Advance sales are expected to increase 0.8%MoM vs. a -0.6% decline in March. Sales ex-autos and gas are expected to be up 0.2% vs. a -0.3% decline in March. The Control Group (a direct feed into GDP) is expected to increase 0.3% vs. a decline of -0.3% the prior month. So, it looks like the consumer, after hunkering down in February and March,  was back to spending ways in April. That should boost early second quarter GDP estimates that are currently just above zero at this point.

• Admittedly a second-tier report, the New York Fed’s Manufacturing Index (Empire Manufacturing) plunged this morning to a level last reached in January and April 2020 as orders and shipments shrank abruptly. The index dropped to -31.8 vs. -3.9 expected and 10.8 in April. The employment gauge indicated headcount shrank, though by less than the prior month. Hours worked contracted too. While one month does not a trend make, and the index has a history of volatility, it looks like activity in the New York region is definitely slowing.

• As for Fed speak, Chicago Fed President Goolsbee looks to be in the pause for longer club, as he said some of the rate hikes are still in the pipeline and yet to be felt. Meanwhile, Atlanta Fed President Bostic was on CNBC saying that while progress on inflation has been made, he didn’t foresee rate cuts until well into 2024. So, put him in the higher-for-longer category as well. As for other Fed speakers this week it’s a long list headlined by Chair Powell on Friday morning where he will be on a policy panel along with former Fed Chair Ben Bernanke.

• We anticipate that much of the Fed speak will sound like what we’ve already heard this morning, that while a pause may be in order next month, expecting rate cuts later this year is a bridge too far for the Fed. The latest futures expectations are presented below with nearly 70bps of rate cuts expected by year-end. Expect the Fed to pushback on those estimates in some of the talks this week.

Agency Indications — FNMA / FHLMC Callable Rates