Why the Debt Ceiling Might Not Be Raised

President Biden believes talks are going well, but are they?

Stocks fell this morning after economic data and Home Depot (NYSE: HD) earnings left investors disappointed. The Dow led the market lower while the Nasdaq Composite traded flat through noon. The S&P split the difference, slipping modestly.

Home Depot shares tumbled more than 5% premarket in response to a rough quarter for the retailer, which reported its largest revenue miss in over 20 years. EPS still beat ($3.82 reported vs. $3.80 expected), but Home Depot also slashed forward guidance due to “further softening of demand relative to our expectations, and continued uncertainty regarding consumer demand.”

Many analysts view Home Depot as the market’s most important retailer due to its unique positioning, making today’s “miss” particularly painful.

April US retail sales came out this morning, too, and the report echoed Home Depot’s struggles with slumping consumer demand. Headline US retail sales grew just 0.4% month-over-month (MoM) vs. 0.8% expected while core sales beat estimates. March’s sales were revised higher from -1.0% MoM to -0.7%.

But the big shock was the nominal retail sales figure, which rose just 1.6% year-over-year (YoY) last month. That’s the slowest growth rate since May 2020 and well below inflation.

This compounded demand destruction fears, which intensified after HD reported earnings. The core retail sales beat, however, left traders a little confused. The market chopped sideways intraday as a result.

Mounting debt ceiling concerns weighed on sentiment as well after Treasury Secretary Janet Yellen issued yet another warning last evening.

“Waiting until the last minute to suspend or increase the debt limit can cause serious harm to business and consumer confidence, raise short-term borrowing costs for taxpayers, and negatively impact the credit rating of the United States,” Yellen said shortly after trading closed yesterday.

“In fact, we have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June.”

Yellen reiterated that a default could come as early as June 1st if Congress and the White House don’t reach a deal. President Biden said over the weekend that talks are going well, while House Speaker Kevin McCarthy stated yesterday morning that they aren’t.

Republicans want spending cuts before they say “I do,” and based on McCarthy’s remarks, it looks like the White House isn’t willing to budge.

“We worry the stock market is not adequately pricing in the risk of a failure of the Democrats and Republicans to reach an agreement to raise the debt ceiling, which would be catastrophic for the US economy,” wrote Loop Capital strategist Anthony Chukumba.

Something that also should be considered is the fact that a default gives both sides of the debate ample political ammunition. Republicans can say that the sitting President, who is up for re-election next year, let the US default on its debts if a deal isn’t reached.

The White House can similarly claim that Republicans did the same.

Politically, that might be a win-win situation, even if everyone else loses. Bulls especially.




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