Deals Galore, a hawkish Bullard, and waiting on DC

• Fed rate hike odds turn positive for the July FOMC meeting. June at 29.%, July at 14.3%
• Fed’s Daly noted that tighter credit may be worth a couple rate hikes
• Biden and McCarthy to meet at 530pm est

Wall Street is struggling for direction as investors watch a lot of dealmaking, await debt ceiling negotiation updates, and rethink the Fed’s interest rate path. The biggest driver for markets remains the ongoing DC talks that will hopefully avoid a looming debt default.  Investors are also keeping a close eye on a steady dose of hawkish Fed speak, which will become the primary driver once DC can reach a deal.  Debt ceiling angst and hawkish Fed speak have the dollar wavering.  

Debt ceiling negotiations are expected to resume this morning as traders start to plan for the worst-case scenario. We are getting closer to Treasury Secretary Yellen’s X-date and that should start to lead to market stress. The base case is still for a debt deal to be reached, but the risk of a default is still on the table. If the US defaulted on its debt, we would see an immediate plunge towards bear market territory and a month-long delay in payments that would deliver a big hit to GDP of around half a percentage point.  With stocks so close to the upper boundaries of the trading range that has been in place since November, it will seems impossible to breakout higher before we get a debt deal done. 

With President Biden expected to meet Speaker McCarthy at 530pm, it will be difficult for stocks to make a major move before we find out if any progress was made. 

The latest round of Fed speak sounds like the central bank is trying to convince markets that rates will stay higher for longer.  The only way to do that is for Fed officials to say that they are not quite done with their rate hiking campaign.  Fed’s Kashkari noted that a June pause on rates wouldn’t indicate an end to their hiking cycle.  Fed’s Bullard, a non-voter, said “I’m thinking two more moves this year – exactly where those would be this year I don’t know – but I’ve often advocated sooner rather than later.” 

The Fed is slowly convincing markets that they won’t be so quick to pivot to rate cuts later this year.  Fed rate cut bets are disappearing for both the June and July meetings.  Treasury yields edged higher following Fed’s Bullard and Kashkari’s comments.  If we didn’t have regional banking concerns on the backburner, yields would have pushed significantly higher.  Credit conditions are going to tighten and that should in theory do the rest of the Fed’s tightening work that they were planning on doing. 

China

US and China relations are entering a rough patch after the G7 took a stand against China.  China’s retaliation included a ban on Micron chips.  Beijing is claiming they failed a cybersecurity review.  We’ve all seen this movie before and back and forth bans/sanctions are bad news for risky assets.

Deals

Deal making is always welcome news on Wall Street.  Today, many deals were announced and that helped provide some support for stocks in early trade.  Mizuho Financial is looking to grow by acquiring Greenhill & Co in a $550 million deal.  Fifth Third Bancorp made a deal to acquire Rize Money, a payments platform. The biggest deal of the day went to Chevron and their acquisition of shale driller PDC in a $6.3 billion all-stock deal.  Healthy M&A is always good news for stocks and today’s deal making suggests companies with cash are looking to expand or become more efficient. 

S&P 500 Index

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