- May 16, 2023
-- Key takeaways:
- The annual increase in consumer prices slowed to below 5% in April for the first time in two years, giving room for the Fed to pause.
- Unlike growth, inflation and interest rates, political brinkmanship is not a long-term driver of market performance.
- We think the debt-ceiling impasse will be resolved, though it may come down to the wire and trigger volatility along the way.
- In our view, the economic slowdown is still ahead of us, but the largest portion of the bear market might have already been traveled.
The investment landscape is never free of risks, but uncertainty is what creates opportunities as headwinds dissipate over time. Last week investors received some encouraging news on inflation, which has been the No. 1 concern over most of the past 18 months. But as inflation and Fed worries are starting to ease, debt-ceiling concerns are poised to intensify as the so-called "X-date" in early June approaches. Unlike growth, inflation, and interest rates, political brinkmanship is not a long-term driver of market performance. Yet it can still be disruptive and have short-term market consequences.Disinflation trend still in place
Inflation gives room for the Fed to pause
- Probably the most encouraging news on the report was that the measure that the Fed has been highlighting, core services inflation excluding shelter (which is largely a function of the labor market), improved meaningfully, rising by the slowest pace in nine months1. The rise in jobless claims over the past month to a one-year high suggests that the labor-market tightness is starting to ease, which should help cool wage growth.
Debt-ceiling standoff: An important but fleeting risk
- The slowing in inflation in both consumer and producer prices takes some pressure off the Fed to hike, reinforcing expectations for a pause. There is still one more inflation report and one more employment report before the Fed's June meeting. But the April CPI reading makes it less likely that policymakers would reverse course and hike rates after leaving the door open for a pause earlier this month.
Sources: 1. Bloomberg, 2. U.S. Department of the Treasury
- A historical perspective helps ease some of the anxiety around the issue. Since 1960 Congress has raised the debt ceiling 78 times, which includes 20 times in just the last two decades2. We do not think that this will be the first time in history that the country will default on its debt. As it's happened several times in the past, there will likely be an eleventh-hour solution, but that won't likely prevent any market indigestion as this process plays out.