SignalPlus Morning Briefing 29 May 2023
US major indices closed the week in strong fashion with a 1.3% rally in the SPX and over 2% in the Nasdaq.?The lethal combination of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla are up a whopping 40%+ YTD, leaving the rest of the SPX 493 up a mere 1% YTD. The YTD performance gap between the cap-weighted vs equal weighted S&P 500 has grown to the largest levels since 1999, way back when Web 1.0 was about to change the world (and did it ever!). Have and have-nots, indeed!
Hot off the press over the weekend, President Biden & House Speaker McCarthy compromised and?reached a debt ceiling deal which offered little in the way of fiscal-discipline, and was pretty much “more of the same” after weeks of political theatre. The summary of the deal includes:
The deal will now be put towards a vote on Wednesday?and leaves the next few days for Biden & McCarthy to sell the deal to their respective parties’ lawmakers. The terms of the deal, as it stands, is pretty much a?free-spending bill and offers no measureable impact to GDP over the next 2 years, and offers next to no compromise for some conservative House Republicans in terms of spending.
Equity sentiment should respond positively to the news as it removes a large, though low-probability tail-risk, assuming that the deal doesn’t fail at the last minute vote on Wednesday. However, the long-term impact of this is trickier for fixed income, as it effectively?puts June and July hikes back on the table, and the lack of spending caps means that?treasury supply is free to expand again?as we continue down the deficit spending path.
The combination of a?strong core PCE, durable goods, personal spending numbers and late Friday expectations of an imminent debt ceiling deal took US yields to weekly highs?and USDJPY north of 140. Rate cuts have been rapidly priced out with?June hiking odds now back up to 70%,?versus just 10–15% earlier in the month. Furthermore, the?Treasury will immediately look to replenish its cash balance as soon as any debt deal is reached, and could?potentially withdraw up to ~US$400bln in liquidity?(via t-bill issuance) swiftly from the system.
Equity markets have been able to overlook the continued shrinkage in central bank balance sheets?(QT), thanks in large to the strength in tech and AI, though we are somewhat cautious that the?potential for a rapid withdrawal of liquidity from Treasury TGA accounts could lead to some under-priced headwinds into the summer. The same concern extends to BTC/crypto prices, which have largely flatlined due probably to a lack of participant interest versus macro correlations, though we remain cognizant that the impact of higher terminal rates will re-filter through to risk sentiment again in the months ahead.
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Finally, this week will be a holiday-shortened week with US markets closed on Monday for Memorial Day. However, the economic dataset will be busy with?JOLTS data on Wednesday, ADP & ISM on Thursday, NFP on Friday, along with a busy lineup of various Fed speakers scattered over the course of the week.
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