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Market Recap – May 30, 2023

Keel Point

May 30, 2023

The biggest news affecting financial markets this week is the tentative agreement to  suspend the debt ceiling until January 1, 2025, along with certain limits on spending.  Although legislative wrangling likely will continue through the week, it should be finalized  in time for the Treasury to meet all its payment obligations. 

  • The deal will have little macroeconomic impact as government spending is largely unchanged. Given that the debt limit is being suspended, the Treasury also will be able to manage its year-end 2024 borrowing to cover spending well into 2025. 
  • Political drama will continue until final passage and may contribute to volatility in financial markets, but the overall compromise will attract enough moderates from both parties to assure passage before delaying program and operating obligation payments is problematic. 
  • After a modest rebound, the upside for U.S. equities is likely limited given how well equity prices have held up so far in the standoff. 

The debate about whether and when the Federal Reserve would resume interest rate  increases reemerged with last Wednesday’s release of the minutes of the early May FOMC  meeting, higher than expected core PCE inflation in April, surprisingly strong growth in  consumer spending and recent hawkish comments by FOMC members. 

  • Real consumption increased 0.5% m/m in April leading to an expectation of Q2 consumption growth being around 2% annualized. While that may not be enough to offset declines in other Q2 GDP contributors, there is growing consensus that the recession may be delayed until 2024. 
  • The 0.4% m/m increase in the core PCE deflator in April was higher than expected, and the annual core inflation rate edged back up to 4.7% from 4.6%: problematic for the Fed. 
  • Concern about the debt ceiling standoff and its likely collateral damage was a principal consideration in the Fed’s pausing rate increases after its May meeting, but that seems to be resolved and should have not negative impact on the economy. 

The potential impact from AI on U.S. productivity growth has immense implications for  higher economic growth rates and U.S. standards of living, according to a recent study by  McKinsey which provides a scenario with real GDP growing at a 3% rate and adding $48  trillion to household wealth by 2030. 

Disclosure: Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC. Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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