Markets react to debt ceiling uncertainty, cooling home prices

Powell curbs rate expectations

On Friday, Fed Chair Jerome Powell and former Chair Ben Bernanke both spoke on monetary policy at the Thomas Laubach Research Conference in Washington. Powell remarked that while inflation is still too high, “Our policy rate may not need to rise as much as it would have otherwise to achieve our goals.” Powell pointed to current credit stress that will eventually impede economic growth, employment, and inflation. Estimations of preliminary Q1 real GDP are already in lockstep with this statement, as it is expected to come in at a low 1.1% on Thursday.

U.S. debt ceiling talks abruptly halt

Within minutes of Powell’s comments, news broke that U.S. debt ceiling talks halted on unamiable terms. 2-year swap rates immediately dropped 15 basis points as market participants lowered their rate expectations and wavered upon news of the debt ceiling. Gold, which tends to act as a haven commodity during times of stress, spiked on the news.

Although talks of the debt ceiling were seemingly optimistic earlier this week, markets ended the week more uncertain than before. Despite last week’s stall, both parties plan to jump-start talks again this week. All this news comes on a tight timeline, as Treasury Secretary Janet Yellen previously noted that payments on U.S. debt can cease as early as June 1, giving the U.S. government little buffer room to further negotiate.

Other U.S. market news

Major housing indicators released last week revealed that the demand for single-family homes, townhomes, condos, and co-ops continued to cool in April. On Thursday, the National Association of Realtors (NAR) posted April’s existing home sales and median home price. Existing home sales declined 3.4% from the prior month to 4.28 million. Existing homes also experienced the largest year-over-year decline in median prices in over 11 years, declining 1.7% YoY to $388,800. Despite reported declines, the NAR stated that these figures are still above cyclical lows.

April U.S. total retail sales ticked up 0.4% month-over-month, snapping a decline in total retail sales that started back in January. This increase in spending is less than the 0.8% growth the market expected as inflation continues to hamper retail purchases. Core retail sales were still in line with market expectations of 0.4% MoM growth.

Summit for international relations

This past weekend, the largest democracies in the world convened in Hiroshima, Japan for the 49th G7 Summit. Discussions among these world leaders revolved around two main topics, Moscow and Beijing. Though unilateral action towards China appears less certain, additional sanctions against Russian energy are expected. G7 participants are also planning to impose further restrictions on Western technology and industrial equipment to make the war effort in Ukraine more difficult for Russia. Ruble has experienced some push and pull recently as traders weigh rising oil prices that benefit the ruble against reduced ruble flows from sanction impacts.

Looking ahead

In the United States this week, April new home sales, durable goods orders, and PCE price index figures will be released. In addition, markets are anticipating preliminary Q1 U.S. real GDP on Thursday. Lastly, keep an eye on updates to debt ceiling talks or G7 policy.