Could Pres Biden’s reputation be wrecked and damage his re-election chances?

Outlook: We get the US flash PMIs today, under the gun to match or surpass Japan, with stunningly good results and even the eurozone, with decent ones (see Critical Data above). Some of the components will get a hard look, like prices paid and employment, as influencing the Fed. We also get new home sales and two regional Fed indices.

The debt ceiling problem has not improved. Yesterday TreasSec Yellen wrote to Congress that June 1 is very, very close to disaster. The NYT reports the Bipartisan Policy Center think-tank said we will be skating on thin ice by next week and every day brings more risk. “The center noted that the federal government could get a reprieve if it can muster sufficient revenue to make it to June 15, when quarterly tax payments are due. That could push a default, the so-called X-date, into July.”

As noted before, the radical right actively seeks default. They think it will wreck Pres Biden’s reputation and damage his re-election chances. Since their base voters are pig-headed enough to brush off Trump’s multiple criminal and civil charges, the radicals may be right. 

Meanwhile, the prospect of a Fed pause or 2-3 cuts this years is vanishing. Reuters reports that while there remains some appetite among the Feds for a pause, “St. Louis Fed President James Bullard talked again of favouring 50 basis points more of rate rises before peaking, while Minneapolis Fed chief Neel Kashkari said entrenched services inflation means ‘it may be that we have to go north of 6%’.

“That talk of 6%-plus rates has not been heard since before the banking jolt in early March. To be sure, that's far from Fed consensus and the likes of Chair Jerome Powell and San Francisco Fed chief Mary Daly have been more equivocal on the outlook in recent days.

“But the net effect has been to see markets scale back expectations for Fed rate cuts later this year, even if futures still seem resolute that the peak in rates is in already. Since early Monday alone, money markets have moved from pricing half a point of rate cuts this year to just 34bp on Tuesday. Economists are even more hawkish and now believe the Fed will not lower its targeted policy rate until the first quarter of next year, according to the survey released by the National Association for Business Economics.”

Reuters includes the chart below as part of its daily summary. Check out the sources, which include Bernanke as well as former IMF economist Blanchard and Brookings. We wouldn’t dare argue with these guys, but connecting labor market tightness tightly with inflation seems old-fashioned and out of date, especially considering the post-pandemic changes in the job market. That includes, for example, blended on-site and work-from-home, the gig economy, and important demographic changes that are already tanking urban commercial real estate.

Forecast: If you are confused and befuddled by the oddball market reactions to the debt ceiling crisis, you are not alone. Remember the parallel Greek situation a decade ago, so severe that some imagined Greece might leave the eurozone for the first departure ever. Yields soared and stock markets tanked. The central bank was in a tizzy, to put it politely.

We are not getting that today in the US, and instead the dollar is the beneficiary of higher yields (for whatever reason, even a reason that would be a negative anywhere else). As a double push, Fed hawks might be signaling that even if there is a pause at the June meeting while the members chew on data, additional hikes are likely in the meetings after that. Note those plurals. St. Louis Fed Bullard is not a voter this time around, but he has been the leading hawk all along and correct in his judgments about what the Fed will do.

Friday’s PCE and core PCE will be key contributors to the evolving outlook on the Fed. Remember we also get the Atlanta Fed GDPNow that day. Here’s the problem—the following Monday is a national holiday in the US, Memorial Day, and markets will be closed. Friday is going to be a nightmare for traders. Get ready to get out. This is not a day to play “trade the news.” It might be fun, but ultra-dangerous.

Tidbit: See the weekly chart of the S&P with the 40-week (200-day) moving average. No wonder the bears are sweating bullets.

Tidbit: The Guardian is back at the top of the investigative reporting game. It reports both China and Saudi Arabia are boycotting G20 in India, while Papua New Guinea, although signing a deal with the US, protests it doesn’t want to be a part of any militarization of the Pacific and won’t be a base for war.

But most of all, it was The Guardian that found, disclosed and shared with the US Dept of Justice information about Trump doing business while in the White House, with perhaps a cause-and-effect link to those stolen documents. France is mentioned.

Meanwhile, one of Trump’s former lawyers (and they are legion) was court-forced to share a giant file about his discussions with Trump in person about how the documents do not belong to him, what he would need to do to remove any documents, and what it takes to de-classify documents. Separately, the lady who won the $5 million defamation suit in a New York court two weeks ago has filed another one for double the amount because Trump repeated the defamation literally one day after the judgment. It’s a mystery why his supporters cannot see what a jerk he is, not to mention a crook. Apparently judgment is clouded by machismo. It’s the same sociological phenomenon as making heroes of Bonnie and Clyde. 

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