In a week that is rather light on economic and earnings news, the attention of Wall Street remains on commentary on monetary policy from senior Federal Reserve officials and even more, on the continued debt ceiling negotiations on Capitol Hill. Yesterday, the major U.S. equity averages sold off after reports surfaced that another meeting between President Biden and House Speaker Kevin McCarthy failed to produce an agreement.
Investors were disappointed by reports that both parties remain dug in on their agendas and the lack of progress on a deal with the early June deadline fast approaching. The failure to strike a deal would risk the United States defaulting on its debt obligations and jeopardize the top credit ratings on U.S. government bonds. The equity futures are indicating some more selling when trading kicks off stateside, with a stronger-than-expected reading on inflation in the United Kingdom also weighing on the market. These concerns have prompted a “flight-to-safety” strategy on Wall Street. It should be noted that the price of Bitcoin, which is viewed right now as a riskier holding, has been under pressure in recent weeks after breaching the $30,000 mark last month. It sits at around $26,750 this morning.
Investors also are monitoring the Federal Reserve and its sentiment regarding monetary policy. There is a sense that with economic growth slowing and credit markets tightening, the central bank may pause interest-rate hikes at its next two-day monetary policy meeting, which commences on June 13th. This decision will likely depend on whether inflation continues to show signs of abating. The Federal Reserve will be closely examining the April personal income and spending report that is due this Friday at 8:30 A.M. (EDT). That release will contain the latest Personal Consumption Expenditures (PCE) Price Index reading, which is the gauge of inflation most closely tracked by the central bank. This afternoon’s release of the minutes from the Fed’s May Federal Open Market Committee (FOMC) meeting may also shed some light on what the lead bank is thinking about inflation.
The markets also were unnerved by comments earlier in the week from JPMorgan CEO Jamie Dimon. The leader of the nation’s largest bank warned about the health of the commercial real estate market. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent commercial real estate industry. Recent banking stress has significantly added to those woes, as about 80% of all bank loans for commercial properties originate from regional banks. Mr. Dimon said, “You’re already seeing credit tighten up because the easiest way for a bank to retain capital is not to make the next loan.” Given this backdrop, we would recommend that investors, especially those with a conservative bent, avoid the stocks of the regional banks and most Real Estate Investment Trusts (REITs), the latter of which own and/or operate commercial real estate assets.
From an investment perspective, we continue to recommend a cautious near-term approach. The market is dealing with so many unknowns, including the debt ceiling stalemate on Capitol Hill, uncertainty about the Fed’s next interest-rate decision, still stubbornly high inflation, and a slowing economy, and this may create a volatile near-term trading environment. It is also worth noting that if a debt-ceiling agreement is reached in the next fortnight, it would likely lead to a hefty sale of Treasury bonds, which would remove more liquidity from the financial system and put further downward pressure on the money supply. This could exacerbate an already tight credit market.
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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