Debt Ceiling Looms Large

Volatility Spike Coming?

Preface

Every week there are a few events that can create significant volatility in the markets. This week the focus is mainly on the FOMC minutes and Core PCE numbers, but there’s another elephant in the room and that’s the US debt ceiling.

Congress continue their talks, with House Speaker Kevin McCarthy set to meet with President Biden at 5:30PM EST today. There were also talks over the weekend but nothing tangible materialized.

In order to avoid a technical US Treasury default in early June, a framework for a deal needs to be in place before the Memorial Day long weekend. Following that, some time will be needed to write the framework into an actual bill. If no compromise is reached this week, we could see volatility pick up in equities as June arrives.

The VIX Volatility Index has come close to its 2022 lows and is now in a zone from which we could expect some upside at any point. This could be looked at as a giant range between 15-30 and we currently sit around 17.

A volatility increase would typically come with a pullback in stocks, and the tech sector has been absolutely flying lately. This could create some nice dip buying opportunities if you’ve been sidelined! I absolutely wouldn’t be shorting anything based on this indicator though.

Bitcoin Seasonality

June has been 50/50 for Bitcoin over the past ten years, with bears winning overall. There’s not enough data here to make many conclusions, so use if for educational purposes only. June has been one of the weaker months, but not in a way that conveys a death sentence.

Stocks Seasonality

Six out of the last ten Junes have come with drawdowns for the benchmark S&P500 stock market index. That said, most of the downside came in June 2022. Over the past 30 years, a red monthly close has occurred 16 times. That’s a little more than 50% and enough of a warning to tread carefully in June across all markets.

Economic Calendar

Highlights

  • S&P Global Composite PMI – Tuesday
  • FOMC Minutes – Wednesday
  • Preliminary Q1 GDP – Thursday
  • Durable Goods Orders – Friday
  • Core PCE – Friday

Breakdown

S&P Global Composite PMI – Tuesday

Both services and manufacturing PMI have been on an uptrend this year amid accelerations in production, new orders and employment growth. Economists see the May numbers cooling slightly, while remaining in positive territory (above 50).

FOMC Minutes – Wednesday

The minutes from the May FOMC meeting will give us more hints as to whether or not the Fed is likely to pause its rate hikes in June. As of now, the odds are at 74% in favour of a pause. This is often a high-impact event.

If the minutes show consensus among committee members for a continued tightening policy (rate hikes and/or reduced asset purchases), the stock market could retreat from its recent advances. A dovish stance, however (rate hike pause and/or increased monetary stimulus), the market could be looking for more upside.

Q1 GDP Revision – Thursday

Preliminary GDP is a look into economic activity and health during the first quarter of 2023. Forecasts are 1.1%, or unchanged from the first estimate. A higher number would imply a stronger-than-expected economy, while a lower number would add to recession and overall slowdown concerns.

Durable Goods Orders – Friday

Durable goods orders (for products with a lifespan of more than three years) have been in a volatile trend lately.

An uptick in durable goods usually signals confidence about future economic conditions. A decline signals that consumers are hoarding more capital for fear of economic pain in the near future.

Core PCE + Personal Income & Spending – Friday

Core PCE forecasts for April are in line with the prior month, which should be neither exciting nor spooky for market participants. That being the case, a surprise in either direction could create some decent volatility to end the week. The YoY projection is 4.6%, while MoM is at 0.3%. Again we will watch how this data impacts Fed rate projections for the remainder of the year.

Earnings

Here’s the earnings to look out for this week. Nvidia stands out.

The most anticipated earnings releases scheduled for the week are NVIDIA #NVDA, Palo Alto Networks #PANW, ZIM Integrated Shipping #ZIM, Snowflake #SNOW, Lowe's #LOW, DICK'S Sporting Goods #DKS, Costco Wholesale #COST, Zoom Video #ZM, BJ's Wholesale Club #BJ, and Global-e Online #GLBE.

That’s all for today. Have a great week!

Jay Charles

Editor in Chief, The Trading Tank.

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