The Debt Ceiling: Just Another Brick in The Wall (of Worry)

Sick of discussing the debt ceiling? Me too. But we can finally move on. To paraphrase the famous Pink Floyd song, the debt ceiling drama was just another brick in the wall…of worry, that is.

The House Wednesday night pushed through legislation to suspend the debt ceiling for two years and impose spending limits. The bill passed by a comfortable bipartisan margin.

The ultra-conservative House Freedom Caucus threw a hissy fit and Democratic progressives made token objections, but despite all the histrionics, an agreement calling for only modest austerity was pushed through the House.

The consequences of the federal government defaulting on its bills are so horrible, lobbyists from Wall Street and corporate America have been putting the screws to lawmakers in Washington. It’s nearly certain that the Senate will pass the bill and President Biden will sign it.

The next brick in the wall of worry will be the meeting of the Federal Reserve’s policy-making Federal Open Market Committee (FOMC), scheduled for June 13-14. There’s currently an 85% chance the FOMC will keep interest rates unchanged and a 15% chance that it boosts rates by a quarter point, according to the CME FedWatch Tool.

A Fed pause this month would represent the first stabilization in rates since the central bank began significantly tightening monetary policy in March 2022 to curb decades-high inflation.

Increasing the odds that the Fed will stand pat was the consumer price index (CPI) report released by the Bureau of Labor Statistics on May 10, which showed that the annual inflation rate in the U.S. fell to 4.9% in April, the lowest since April 2021 and below consensus forecasts of 5%. Compared to the previous month, the CPI rose 0.4%, higher than 0.1% in March but in line with market expectations.

The next CPI is scheduled for release on June 13, which coincides with the FOMC’s meeting. The consensus is that the data will show a further easing of inflation.

Data released Thursday showed that inflation in the euro zone cooled more than expected last month, with the trading bloc’s annual headline inflation rate falling to 6.1% in May from 7% in April. That’s the lowest level since February 2022 and better than the consensus estimate of 6.3%.

The sanguine inflation numbers from the Continent increased the likelihood that the European Central Bank will take a more dovish stance when it meets on June 15. European stocks rose Thursday.

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The main U.S. stock market averages kicked off June with a relief rally, closing sharply higher Thursday as follows:

  • DJIA: +0.47%
  • S&P 500: +0.99%
  • NASDAQ: +1.28%
  • Russell 2000: +1.05%

Yields slipped, with the two-year U.S. Treasury falling to 4.34%. Amid this improving backdrop, the CBOE Volatility Index (VIX), aka “fear index,” dipped below 16. A CBOE reading below 20 generally indicates lower risk.

The Saudi-Russo feud…

Investors should turn their attention from Washington and toward Riyadh. Trouble is brewing within OPEC+.

The debt ceiling crisis, albeit resolved, has exacerbated recession fears. Hence the precipitous decline in the price of crude oil over the past month, although it jumped nearly 2% on Thursday in tandem with the equity rally (see chart).

Last month, the Saudis told oil market short sellers to “watch out,” an ominous warning ahead of the OPEC+ meeting in Vienna this weekend. Even more ominously, the oil cartel has banned several media organizations from covering its deliberations, which is highly unusual.

Further adding to the drama are reports this week that the Saudis and Russians are at each other’s throats, due to Russia’s cheating on oil quotas. Russian President Vladimir Putin is desperate for revenue to sustain his war machine in Ukraine; the cartel’s de facto leader Saudi Arabia wants to shore up prices by keeping a lid on production.

The last time the Saudis and Russians feuded was in March 2020, which triggered an oil price war that saw a 65% quarterly decline in the price of crude.

OPEC+ has been losing clout in recent years, as oil markets become more regionalized. That said, the cartel continues to pack a powerful punch and its next move is unclear. Stay tuned. All in all, it’s just another brick in the wall.

In the meantime, if you’re nervous about the risks I’ve just described, consider the time-proven advice of my colleague, Dr. Stephen Leeb.

As chief investment strategist of The Complete Investor, Dr. Leeb has produced a special report on how to survive the tectonic shifts facing the financial world.

Amid the upheavals he sees ahead, Dr. Leeb says the most profitable investment opportunity won’t be found among conventional assets. His research indicates it will be a tiny under-the-radar play, as revealed in this report.

John Persinos is the editorial director of Investing Daily.

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