For Debt Ceiling Debate No News is Not Good News

Most children enjoy a rousing game of chicken but markets and global investors do not. While neither side is walking away from the table, an agreement has yet to be met with both sides holding firm, waiting for the other to flinch.?

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Most officials remain?“optimistic”?a deal will still be met in time, others, however, note the self-inflicted harm already inflicted by the standoff.?According to House Speaker Kevin McCarthy, the House may consider a deal next week.

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As we have noted time and time again, while the risk of default remains limited, the consequences could be dire including a potential downgrade to the nation’s credit rating, insolvency issues throughout the financial system, elevated future borrowing costs and the potential to send shockwaves through an already fragile financial system still reeling from the recent collapse of Silicon Valley Bank among others.

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Credit default swaps (CDSs), meanwhile, a form of insurance against a borrower not making full or on-time payments on their debt, rose to the highest level since the financial crisis, suggesting the prospect of a default is not entirely lost on investors. Up 153bps since the start of the year, the cost of insuring U.S. debt against default is over 168bps, according to?Bloomberg?data. Spreads on five-year CDSs have also widened more than 40bps since the start of the year.

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Yesterday, housing starts unexpectedly rose 2.2% in April, pulling the annual pace up from 1.37M to 1.40M, a two-month high. Starts were expected to decline 1.4%, according to the median forecast on?Bloomberg. Single family starts increased 1.6%, while multi-family starts rose 3.2%. Year-over-year, housing starts fell 22.3% in April, marking a full year of decline.

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Building permits, however, decreased 1.5% in April, pulling the annual pace down from 1.44M to 1.42M, a three-month low. Building permits were expected to be unchanged in April, according to?Bloomberg. Single family permits rose 3.1%, while multi-family permits dropped 7.7 %. Year-over-year, building permits declined 21.1% in April following a 23.4% decrease in March, and marking the ninth consecutive month of decline.

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Turning to the Fed, the market may be misguided in its expectations for rate cuts this year as inflation is unlikely to subside as easily as investors anticipate, according to Atlanta Fed President Raphael Bostic. Speaking on Monday in an interview with CNBC, Bostic said he doesn't agree with the market’s call on how quickly price pressures will subside, but offered optimism about the potential for a soft landing.

“My baseline case is we won’t really be thinking about cutting until well into 2024.* If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go,”?Bostic said.

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According to?Bloomberg, investors continue to anticipate a series of rate cuts potentially beginning as early as July, despite a still elevated level of inflation more than double the Fed’s preferred 2% level.?

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Today, at 9:05 a.m. ET, Fed Governor Philip Jefferson gave a speech on the economic outlook at the National Association of Insurance Commissioners (NAIC) International Insurance Forum in Washington, D.C., and at 9:30 a.m. ET, Fed Vice Chair for Supervision Michael Barr will testify before the Senate Banking Committee in its Semiannual Hearing on Supervision and Regulation. Later at 10:00 a.m. ET, Dallas Fed President Lorie Logan will give a speech at the Texas Bankers Association’s annual convention in San Antonio.

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This morning, initial jobless claims declined by 22k from 264k to 242k in the week ending May 13, a two-week low. According to?Bloomberg,?jobless claims were expected to decline to 253k. Due to reported fraud, however, the latest data offers little additional insight into the health of the labor market. According to reports, Massachusetts accounted for nearly half of the nationwide increase in unadjusted claims last week.

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Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, declined from 1.807M to 1.799M in the week ending May 6.

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Also this morning, the Philly Fed Business Outlook rose from -31.3 to -10.4 in May, the highest reading since January, albeit the ninth consecutive month of a negative print. In the details of the report, prices paid rose from 8.2 to 10.9, new orders gained from -22.7 to -8.9, and shipments increased from -7.3 to -4.7 in May. Also, delivery times gained from -25.0 to -9.3 and inventories rose from -17.9 to +6.4. On the other hand, employment fell from -0.2 to -8.6, and the six-month outlook index dropped from -1.5 to -10.3 in May, the lowest reading since October.

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Also this morning, existing home sales fell 3.4% in April from 4.43m to 4.28m, a three-month low. According to the median estimate on?Bloomberg, existing home sales were expected to decline 3.2% at the start of Q2. Year-over-year, existing home sales dropped 23% in April, the 21st?consecutive month of decline. Due to a decline in sales, the months’ supply of existing homes rose from 2.6 to 2.9 months, averaging 2.7 months over the past three months. From a price standpoint, the median cost of a previously owned home fell 1.7% in April from a year earlier to $389k.

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Finally this morning, the Leading Index declined 0.6% in April, as expected and following a 1.2% drop in March.

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Tomorrow, the economic calendar is empty.

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?-Lindsey Piegza, Ph.D., Chief Economist?

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*Yesterday we inadvertently wrote 2023 instead of 2024.