President Biden and House Speaker McCarthy reached an agreement yesterday… to keep talking. The agreement on raising the debt ceiling remains elusive, yet the party line from both leaders is that the conversation they had was productive and that they will continue to talk each day.
That is a positive-sounding indication, yet stock market participants are appearing fatigued by all the talk and the absence of the all-important action of raising the debt ceiling with June 1 lurking as a potential X-date when the U.S. might not be able to pay all its bills.
Currently, the S&P 500 futures are down 12 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 60 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 67 points and are trading 0.2% below fair value.
This softer tone isn’t just about the debt ceiling, however. In fact, it is fair to say, with the S&P 500 near the top of a nine-month trading range and longer-dated Treasury yields backing up, that the market remains pre-disposed to believe a debt ceiling deal will get done, enabling the U.S. to avoid a debt default.
The debt ceiling drama has been a permanent distraction of late, but other components in the fray include the specter of the Fed continuing to raise rates, because inflation remains too high, even as other indications denote a slowing in economic activity.
These elements are part of the mix today.
The 2-yr note yield is up six basis points to 4.40%, leaving it up 34 basis points for the month; meanwhile, the preliminary May manufacturing PMI reading for the eurozone dropped to 44.6 from 45.8 in April (a number below 50.0 is indicative of contraction), and Lowe’s (LOW) followed Home Depot (HD) with disappointing FY24 guidance, noting it has seen lower do-it-yourself discretionary sales.
Another hang-up for the stock market has been the inability of the S&P 500 to forge a close above 4,200 on heavy volume. Actually, it hasn’t even been able thus far to forge a close above 4,200 on light volume.
The 4,200 level has put up some stern resistance since last August, which is why it is a closely-watched level now since the previous failures to close above 4,200 have been followed with periods of increased selling interest.
The debt ceiling uncertainty has created a valid excuse for the lack of conviction around 4,200, yet its importance as a key technical level to watch will ratchet up if, and when, a debt ceiling deal gets done. The presumption then will be that a deal should provide a breakout catalyst. If that breakout doesn’t happen, as envisioned, the market will presumably be at risk of a corrective phase or more vulnerable to selling interest catalyzed by a fear of the Fed and/or an economic slowdown that crimps earnings prospects.
The stock market, therefore, is at a crossroads where talk is cheap and action is pivotal.
Originally Posted May 23, 2023 – Talk is cheap at pivotal crossroads
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