Equites were again mixed as all were parsing comments about the prospects of a debt deal and latest Fed speak.
FRB Chair Powell stated that interest rates may not need to rise as high given credit stress but noted that failure to tame inflation will prolong the pain, reiterating the Fed is strongly committed to returning to the 2% target. Primarily based on this comment, swaps have reduced the odds of another interest hike at the June meeting to 25%, down from 40% yesterday.
President Biden urged negotiators to keep pursuing a debt limit deal after Speaker McCarthy indicated that both sides may reach an agreement very soon. However, pessimism returned following headlines the Republican negotiators abruptly left a closed-door meeting, reminding all that debt ceiling risk continues to loom. As noted last week, high stakes political drama could return at moment’s instance.
Returning to FRB Chair Powell’s remarks, Powell stated the positive supply shock from globalization was halted and reversed by the pandemic and the positive experience of the pre pandemic decades may not be repeated.
Powell said if this indeed the case, this would “argue for a higher trend level of inflation and arguably the neutral interest rate.”
The relative resilience of the hard economic data in the face of elevated rates suggests that the current neutral rate is above the 2.5% threshold that the Fed first estimated in 2019.
Writing it differently, availability is now the primary determinant of a purchasing decision, not price as trade has been weaponized. Reliability has replaced efficiency.
Many times, the narrowness of 2023 markets have been discussed. Bloomberg writes five names are responsible for almost 80% of this year’s advance and 7 names 90% of the gains.
Here is another milestone according to the Newswire. Apple, the most valuable company comprising 7.4% of the S & P 500 capitalization is worth more than the entire Russell 2000 index of small caps. [Microsoft is 6.6% of the S & P 500]
Wow! Just as an aside, according to the Investment Company Act of 1940, a diversified mutual fund is partially defined as not having any one company comprised of more than 5% of its assets. Can it be suggested the S & P 500 is no longer diversified based upon this definition?
The economic calendar is comprised of several housing statistics, manufacturing surveys and revised GDP data and ancillary inflation data points.
Last night the foreign markets were mixed. London was down 0.01%, Paris down 0.33% and Frankfurt down 0.29%. China was up 0.39%, Japan up 0.90% and Hang Seng up 1.17%. Futures are flat ahead of high profile debt ceiling negotiations between the President and the Speaker. The 10-year is up 2/32 to yield 3.70%.