Recession, what recession?

At the start of a new week, stocks are stable, the S&P 500 is roughly flat, however, the Nasdaq is up 0.3%, and has broken through its 52-week high, which is a bullish technical indicator. There is still a lot of talk about a recession out there, however, the Nasdaq is up more than 25% YTD and is higher by nearly 4% in the past week. Added to this, yields are also moving higher, which is not a recessionary signal and safe havens like gold are also lower, the yellow metal is down 1.6% over the past month. These are not normal times, however, as we move closer to the middle of the year, there are signs that the hard landing some were looking for is being pushed further out. One of the truisms about markets is that timing is everything, preparing for a recession that hasn’t happened has not been a productive trade so far in 2023.

Positive signs that a debt deal will be reached in time

There are some positive signs that the US government will reach a deal to raise the debt ceiling, even if a deal hasn’t been agreed yet. President Biden and the leader of the house, Speaker Kevin McCarthy, are meeting at a crunch time for this debate as the US is running out of money. Speaker McCarthy said that he was “positive” earlier on Monday, although he has ruled out cuts to military spending as part of a deal to raise the debt ceiling. While it seems likely that a deal will get done, and relations between Biden and McCarthy seem cordial, the closer we get to the early June deadline when the US is likely to run out of money, the closer we get to an accident whereby the US could default on its debt. The markets are hopefull, hence why stocks and bonds are behaving themselves. We think that the chances are high that a deal will be reached in time, however, the more sensible thing would be to scrap the debt ceiling altogether so that the risk of a US default is off the table. Sadly, we don’t think that the US politicians are grown up enough to come up with a long-term solution to this problem. For now, the outcome is binary: they strike a deal, and we see a short-term celebratory risk rally, if they fail to come up with a deal and the worst happens then all hell breaks out and expect a very turbulent June for asset prices. This is currently reflected in the very short end of the Treasury Bill curve, the yield on June 6th bills is 5.9%, the yield on July 5th bill is 4.78%, thus the bond market seems to expect a last-minute deal and for things to calm down by July.

The Fed: to pause or not to pause…

If/ when the debt ceiling story is resolved, the market is likely to focus once more on the Federal Reserve. The latest Fed headline that is worth noting came from Federal Reserve Bank of Minneapolis President Neal Kashkari, who said on Monday that even if the Fed does pause in June, this shouldn’t be a signal that Federal Reserve tightening is over. Thus, the Fed could pull an RBA move, and pause rates before reversing course the very next month. In terms of the market impact, the RBA’s actions have had little impact on the Aussie dollar’s fortunes and AUD/USD has mostly been trading sideways in recent weeks. The dollar index has been trading with an upward bias in the past month, and it is higher by more than 1.4% on a broad basis. FX is not where the action is right now, instead the market is gravitating towards mega cap tech stocks. This sector went through its period of retrenchment and economising in recent months, and investors are returning to the sector in a big way. In another sign that we are not trading as if there will be a recession any time soon, the real estate sector and the communications sectors are both the top performing sectors in the S&P 500 on Monday.

Miracle weight loss drug gives Pfizer a boost

Two notable movers on Monday are Pfizer, which is up more than 5% on news that it will release a weight loss pill that has similar effects to Ozempic. The fact it is in pill form and thus easier to take compared with an Ozempic injection is good news. However, the bigger driver of Pfizer gains is that a weight loss drug is considered a cash cow in the current environment. There is huge demand for weight loss medication for all, even those who are not diabetic, and this newest drug is likely to have a huge order book and be a big seller for Pfizer. At the other end of the spectrum is Micron Technologies Inc. The US chip maker was a notable under performer on Monday, and closed down 2.85%, after China banned their chips saying that the company failed a cyber security review. This seems like a tit for tat spat, which Micron has got in the middle of, however, it comes at an interesting time when President Biden said that he expects relations with China to thaw.

Data to watch

The rest of this week is full of fundamental data to watch including PMI readings for May – will they show a slowdown in the service sector? If so, this could raise recession risks since the service sector has been holding up the global economy so far this year. UK inflation is also one to watch. The headline prices are expected to fall sharply, down to 8.3% for April from 10.1% in March, as annual energy price increases fall out of the index. However, if there is an upside surprise then it could weigh heavily on UK asset prices, especially the FTSE 250 and domestically focused sectors. It could also boost bond yields, and weigh on Gilt prices, as the BOE is looking for a sharp drop in inflation to boost growth later this year and to allow it to pause interest rates. Core inflation is also worth watching, the annual rate is expected to stay steady at 6.2%, an upside surprise could also dent sentiment towards UK asset prices.