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Markets reversed moderate gains, gains the of result data suggesting waning inflationary pressures, to fears that growth and profits may erode in the Fed’s quest to quell inflation.

Equites were further spooked by comments from two Fed hawks stating monetary policy is “almost in restrictive territory but not quite yet,” interpreted as the Fed may stay on the “tighter side” in 2023.

The Fed Beige Book, or the statistical compilation utilized at the upcoming Fed meeting, indicated the pace of price increases had slowed and price growth was expected to moderate further in the year ahead but prices are still rising, and the rise is still considerably higher than the mandated 2% speed limit.

In a mattered of minutes “bad actually became bad,” defined as monetary policy may be having its intended affects; rates will continue to go higher in a slowing environment which than increases the odds of a hard landing.

Changing topics, the vitriol regarding the debt ceiling is increasing.  Today the government will reach its credit limit and must be increased sometime in June/July to avoid default.

The White House accused congressional Republicans of “unprecedented economic vandalism” after an Arizona congressman said the US should decline to raise the debt ceiling, intensifying the rhetorical battle over the spending limit.

FRB Chair Powell has adamantly stated the Federal Deficit is unsustainable at this level.  Today the federal debt will reach $31.4 trillion and Republicans want to stop ever increasing spending trends of the last four years as debt is now 100% of GDP, up from 39.2% as recently as 2008 and 77.6% in 2018 as per the WSJ.

The cost of financing that debt is rising fast along with interest rates, and interest on the debt will take up an increasingly large share of federal revenue.

For the first two months of 2023, debt service coverage has doubled from about $50 billion to almost $100 billion.

Talking about default is even more reckless than reckless spending. A 2011 standoff over the debt ceiling prompted S & P to issue the first ever downgrade of the US government credit rating from AAA to AA+.  The financial markets had a period of turmoil.

What will happen today?  Will the markets have any reaction to the housing data?

Last night the foreign markets were down.  London was down 1.21%,  Paris down 1.72% and Frankfurt down 1.67%.  China was up 0.49%, Japan down 1.44%  and Hang Seng down 0.12%.

Futures are down about 0.75% and recession and profit fears.   The 10-year is off 10/32 to yield 3.41%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.