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Another Relatively Quiet Day

Equity markets are sanguine about a potential default, believing an eleventh-hour compromise will be made after both sides of the political aisle have attempted to appease their party’s bases. 

The ideologues must be convinced “their side” have both fought hard enough for their causes with only the most zealot ideologue holding out.  It is widely accepted defaulting is only marginally worse than out of control and unsustainable spending, especially in a rising rate environment.    

 The credit default swaps market is, however, suggesting a different outcome.  Short dated US Treasury Credit Default Swaps (CDS) are more expensive than countries who have defaulted including Russia, Greece and Brazil.

According to Bloomberg, executives from the nation’s three largest banks—JP Morgan, Citi and Bank America, are both privately and publicly are sending a cohesive message to the Biden Administration and Congress of “Get it Done now.”  The Banks are collectively warning about the damage that might occur if the country defaults or does not reign in its spending.

Changing topics, Bloomberg writes 2Q23 earnings estimates have declined again.  Profits are now expected to fall by 7.8% versus 7.2% the week before and 6.5% about a month ago.  Third quarter results are also expected to be negative by 0.7% before a rebound in the fourth quarter.

The S & P 500 is on track for four straight quarters of EPS decline, the longest stretch in “many years.” 

Bloomberg further writes the earnings drop may not be as deep as the pandemic but is “considerably longer.”  A profit decline of three quarters last occurred in 2015-2016 when the Fed started their last inters rate hiking cycle.

If the debt ceiling debate is not resolved or a default occurs, Bloomberg writes the profit decline could be one of historical proportions.

Commenting on yesterday’s markets, the Dow fell about 1% on debt ceiling fears.  The NASDAQ off about 0.2%.  Treasuries increased in yields across the spectrum. 

Late yesterday afternoon, Speaker McCarthy stated a compromise to raise the debt ceiling is possible “within days” but acknowledged both sides are still far apart.

Last night the foreign markets were down.  London was down 0.08%, Paris down 0.16% and Frankfurt up 0.28%.  China was down 0.21%, Japan up 0.84% and Hang Seng down 2.09%.

Futures are nominally higher on hopes of debt ceiling breakthrough.  The 10-year is up 2/32 to yield 3.53%.

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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.