Debt Ceiling, Consumer Worries Dominate a Potentially Uncertain Week for Markets

(Monday market open) Emerging from their best week since March, major stock indexes treaded water early Monday ahead of what could be a dramatic week highlighted by concerns over the U.S. debt ceiling.

Retail earnings, Fed speeches, and several bearish developments in the sizzling info tech sector work into the mix, but all eyes will likely turn to Washington as Congress and the White House try to avoid a default with only 10 days left before the deadline.

The U.S. has never defaulted, so it’s hard to pinpoint the potential impact on markets if that happens. Fixed income assets and the dollar would likely bear much of the pain, with Wall Street far from immune.

“We believe stock markets would drop as short-term interest rates spike (in fact, this is already happening for Treasury bills maturing near the expected default date),” notes the Schwab Center for Financial Research. “There would be a drop in the value of the U.S. dollar, and major rating agencies would downgrade the U.S. government’s credit rating. It could also mean a long-term rise in the cost of borrowing for the U.S. government, given the loss of its pristine credit history.”

Earnings and data are scarce today, but the calendar becomes more crowded tomorrow as retail earnings resume. New Home Sales for April are also on deck Tuesday, and a key inflation reading comes Friday ahead of the long Memorial Day holiday weekend.

Morning rush

• The 10-year Treasury note yield (TNX) is roughly flat near 3.68%.
• The U.S. Dollar Index ($DXY) edged lower to 103.11.
• The Cboe Volatility Index® (VIX) futures climbed to 17.09.
• WTI Crude Oil (/CL) is nearly flat at $71.93 per barrel.

Stocks in the Spotlight

The tech sector led last week’s gains but could face pressure today based on new developments for some key stocks. Micron (NASDAQ:MU) sank over 5% in premarket trading after China said the company’s products failed a cybersecurity review. Facebook owner Meta Platforms (NASDAQ:META) (META) dropped more than 1% in premarket trading, after being hit with a record 1.2 billion Euro ($1.3 billion) European Union privacy fine. Apple (NASDAQ:AAPL) also is in the news for bearish reasons, having been downgraded by Loop Capital for what the firm says is “downside risk” to revenue for the current quarter.

JPMorgan Chase (NYSE:JPM) is having an investor day today, which is likely to mainly focus on the company itself but might include some market-moving macro forecasts, so stay tuned.

Retail earnings continue this week with expected results from Lowe’s (LOW), Dick’s Sporting Goods (DKS), Best Buy (BBY), and Dollar Tree (NASDAQ:DLTR). The ball gets rolling tomorrow with LOW and DKS both expected before the opening bell. Wednesday’s earnings highlight is one of the handful of stocks responsible for much of the S&P 500’s® (SPX) gains so far this year: Nvidia (NASDAQ:NVDA). Last week’s disappointing Foot Locker (NYSE:FL) earnings hurt other sporting goods shares, so monitor DKS tomorrow to see if this is a wider spread issue for sporting goods companies in general.

The forecast from LOW was on the gloomy side last time out as the company projected comparable sales to be flat to down 2% from 2022. The challenge for both LOW and rival Home Depot (NYSE:HD) is to find a way to keep the glow following huge growth during the pandemic years when so many people embarked on home improvement projects like home offices and extra bedrooms.

HD’s earnings and outlook last week drew jeers from the Wall Street crowd. The company missed analysts’ average revenue forecast and offered tepid guidance, saying people are doing smaller projects instead of major renovations. Still, LOW shares had a decent week ahead of its own earnings, perhaps on ideas that HD’s struggles might have partly reflected market share gains for LOW

Eye on the Fed

Chances of the Fed pausing rate hikes in June stood at 86% of this morning, according to the CME FedWatch tool. There’s a heavy calendar of Fed speakers this week, starting with St. Louis Fed President James Bullard, a noted hawk, this morning.

Fed Chairman Jerome Powell said Friday that the recent turmoil in the banking sector may have helped tighten credit conditions to the point where growth and inflation could slow. “Our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell told a panel in Washington. “Of course, the extent of that is highly uncertain.” These comments drew a warm greeting on Wall Street and appear to have the futures market pricing in greater chance of a pause than it did before his remarks.

Still, the next Federal Open Market Committee (FOMC) meeting in mid-June remains a moving target as far as rate moves are concerned. Fed speakers have generally continued to sound hawkish lately, with a couple of exceptions, and economic data aren’t looking too bleak. Minutes from that meeting are due out Wednesday afternoon. A host of inflation, wages, and jobs data between now and the next FOMC meeting mean any rate projections now could look dated before long.

What to Watch

More homework: April New Home Sales are due tomorrow morning after a surprising 9% jump in March. We’ll see if that was a blip or perhaps the start of longer-term improvement in this sagging indicator.

Analysts see New Home Sales dipping to a seasonally adjusted 660,000 in April from 683,000 in March, according to Trading Economics. That would be down about 2% month-over-month, but still well above any monthly level over the last year besides the March reading. Tight supplies of new homes have prices trending higher.

GC Daily Chart

CHART OF THE DAY: GOLD LOSES SHINE. Gold futures (/GC—candlesticks) had a tough time last week as the U.S. dollar firmed and hopes grew for a debt ceiling agreement. By Friday, front-month futures were testing technical support near the 100-day moving average (blue line) around $1,935 per ounce. Things could change quickly for /GC if the debt standoff continues, however. U.S. default would likely hurt the dollar and perhaps send investors into so-called “safe havens,” one of which has traditionally been gold, though no investment is truly safe. Data source: CME Group (NASDAQ:CME). Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Crowded shelves: During the pandemic, when workers were hard to find and consumer demand came under pressure, warehouses and ports got backed up and company supply chains jammed. The situation’s improved, but it’s not over. It’s hard to pick a pair of companies more different than Foot Locker (FL) and Deere (NYSE:DE), but both have supply chain issues in common, investors learned from their earnings reports Friday. It’s nothing new for FL, which said in late 2021 it expected supply chain issues to last well into 2022. Now it’s almost mid-2023, and FL said in its press release Friday it needs to “take more aggressive markdowns to both drive demand and manage inventory.” The challenges facing all of retail—including inflation and consumer caution—probably caused this to last longer than FL and many other companies had expected. At DE, there’s a different dynamic at play. The company said in its earnings press release that “supply-chain constraints continue to present a challenge,” though it’s seeing improvement. In the case of DE, any constraints likely reflect demand outstripping what DE earlier this year called a “fragile” supply chain.

Earnings scorecard: Though only about half of the major retailers reported through the end of last week, Q1 earnings season is basically in the books for most sectors. So far, 95% of S&P 500 companies have reported, and 78% reported a positive earnings per share surprise while 76% recorded a positive revenue surprise, according to FactSet. Keep in mind that analysts set a very low bar going in, so the positive surprises didn’t have a steep ladder to climb. And despite so many earnings “beats,” Q1 year-over-year earnings per share (EPS) are still seen falling 2.2%, FactSet said. Additionally, companies issuing negative Q2 guidance outnumber ones issuing positive guidance.

Minute by minute: Before the FOMC meets again, we’ll get a glance this Wednesday afternoon at minutes from this month’s meeting. The FOMC’s decision to raise rates 25 basis points earlier in May was unanimous, and the hawkish tone in recent Fed speeches doesn’t hint at much variance among FOMC officials. If anyone voiced caution about additional rate hikes during discussions at the last meeting, it will be in the minutes and may provide clues into how likely a pause might be in June. One theory is that the Fed might pause in June to better understand the cumulative economic impact of increases to date. It’s almost unprecedented to have rates go up 500 basis points in 14 months, as we just experienced, and rate hikes generally take months to work their way through the economy.

Calendar

May 23: April New Home Sales and expected earnings from AutoZone (NYSE:AZO), Lowe’s (LOW), and Dick’s Sporting Goods (DKS).

May 24: Expected earnings from Nvidia (NVDA).

May 25: Q1 GDP second estimate, April Pending Home Sales, and expected earnings from Dollar Tree (DLTR), Costco (NASDAQ:COST), and Best Buy (BBY).

May 26: April Personal Consumption Expenditures (PCE) prices, April Personal Income and Personal Spending, April Durable Orders, Final May University of Michigan Consumer Sentiment.

May 29: Memorial Day – markets closed.

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.