Weekly Market Update: June 5, 2023

A deal in principle to suspend the debt ceiling limit was reached in late May and appeared on track to be enacted as we went to press. Assuming passage, the accord removes a headwind for the market, as the United States will not default on its obligations. A failure would have jeopardized the credit ratings on U.S. issued debt and roiled the equity and bond markets. The economic impact of the bill, from what we know, should be relatively minor on growth or inflation.

Recent inflation news, though, was not as promising. The Personal Consumption Expenditures (PCE) Price Index, which is closely monitored by the Federal Reserve for signs of price growth, came in above expectations. Specifically, the April PCE Price Index rose 0.4% on a month-to-month basis and was up 4.4% for the one-year period. Both those figures exceeded the consensus forecasts. The core PCE Price Index, which excludes the volatile energy and food categories, rose a higher-than-expected 4.7%. The readings suggest that inflation remains sticky.

The price data puts the central bank in a tough spot. Sentiment heading into the PCE report was that the Fed would pause on interest rates at its mid-June Federal Open Market Committee (FOMC) meeting. But with consumer spending still strong (up 0.8% in April) and the job market tight, consumers are still willing to pay higher prices for goods and services, which is keeping inflation elevated. The recent data bring the possibility of another interest-rate hike this month back into play.

Meantime, the likelihood of a recession later this year is high. In addition to the increasingly restrictive monetary policies put in place to slow growth, the pending debt ceiling deal will bring a two-year fiscal spending cap. The latter will pull back on the relief measures and spending growth that started during the pandemic. This bears watching as the consumer sector, helped by unprecedented stimulus, powered the recovery from the COVID-19 pandemic crisis.

Conclusion: The financial markets rallied on the tentative debt ceiling deal, but with the inflation data leaving the door open for another interest-rate hike, the stock market may face some near-term obstacles.

Source: ValueLine.com