MANHATTAN (CN) — U.S. indices split this week as concerns about the debt ceiling and persistent inflation keep investors watching both situations closely and hoping for a path through.
By the closing bell on Friday, the Dow Jones Industrial Average reversed larger losses from earlier in the week and managed to finish down 333 points. The S&P 500 and Nasdaq both had winning sessions and weeks, finishing up 14 points and 318 points since last week’s closing session, respectively.
On Friday, the Bureau of Economic Analysis reported that inflation in April higher than expected, with a 0.4% increase to the personal consumption expenditures index even without volatile food and energy prices included. This marks the third time in the last four months that the core PCE index has increased by at least 0.4%, with the one outlier being in March.
Not only that, but the annual core inflation rate gained again, increasing from 4.6% to 4.7%, suggesting the Federal Reserve’s bevy of interest rate hikes still haven’t taken hold on the economy.
April’s PCE index “was a little hotter than expected and suggests the Fed still has its work cut out for it,” wrote Paul Ashworth, chief North America economist at Capital Economics, in an investor’s note. “The debt ceiling impasse and its aftermath is likely to keep the Fed on the sidelines in June, but some officials are now eyeing a return to hiking at the late-July [Fed] meeting.”
The talks in Congress to extend the debt ceiling also have Wall Street worried, especially since last-minute asks could derail whatever deal is in the works. June 1 is the day many have pegged as the “final day” for the debt ceiling to be raised, but experts say the Treasury has until June 14 or even later to start worrying about interest payments on debt.
“While many of the press headlines focus on a default on Treasury debt, there is no imminent risk of Treasury missing debt payments,” Nancy Vanden Houten at Oxford Economics wrote Monday in an investor’s note. “We think the first real risk of a missed interest payment would be in late July.”
The debt ceiling debacle also is weighing on consumers’ minds. The monthly consumer sentiment survey by the University of Michigan saw significant drop — from 63.5 points on the index in April to 59.2 points this month — likely due to concerns about the debt talks. “If the debt ceiling is reached, we will not be able to depend on consumer resilience to prop up the economy and avoid the catastrophic economic consequences to follow,” survey Chief Economist Joanne Hsu said in a statement.
Analysts are also split on what the debt ceiling battle and inflation will mean for how the Fed approaches interest rates. Minutes released Wednesday from the Federal Open Market Commission’s meeting earlier this month, when the central bank raised interest rates by 25 basis points, show members are split on whether the Fed needs to keep going.
The minutes state that “many members” wanted to “retain optionality” to either hike, lower or keep interest rates stable after the May meeting, while “some members” commented that “progress in returning inflation to 2% could continue to be unacceptably slow” and could warrant “additional policy firming” at future meetings.
Experts say markets have now repriced their outlook for Fed policy, with many now considering further rate hikes instead of a pause and postponing when they expect the central bank to start cutting rates.
At least one Fed member had hinted they would support further rate hikes prior to the minutes being released. In a speech before the FOMC minutes were released, Fed Governor Christopher Waller said more rate hikes would depend on economic data over the next few weeks. “I do not expect the data coming in over the next couple of months will make it clear that we have reached the terminal rate,” Waller said in a speech. “And I do not support stopping rate hikes unless we get clear evidence that inflation is moving down toward our 2% objective.”
Waller did note, however, the credit squeeze among some banks could also influence him. “I’ll also be reviewing data on credit conditions to evaluate how much potential tightening is coming from the banking sector,” he said.
Investors received mixed messages from revisions to gross domestic product, which were released on Thursday. The numbers show GDP increased at an annual rate of 1.3% during the first quarter, higher than the advanced estimate of 1.1%.
Ryan Sweet, chief U.S. economist at Oxford Economics, said the “true health of the economy likely likes somewhere in between” GDP and gross domestic income, which has fallen in three of the last four quarters. Sweet still predicts a recession sometime in the latter part of the year but notes it likely “could be muted … because there are no glaring imbalances in the economy’s balance sheet.”
New home sales numbers looked better than expected earlier in the week, with 683,000 new houses sold in April, though numbers from March were revised downward. Most of the gains came from sales in the Midwest and South, which saw increases of about 12% and 18%, respectively. Sales in the Northeast and West dropped.
On the plus side, median home sale prices dropped to their lowest point since late 2021, declining from $455,000 in March to $420,000. Experts say the Federal Reserve’s interest rate hikes, slowing construction activity and material costs falling are the reason for the regression in new home prices.
“That drop in sales prices coincided with a big pickup in sales of units not yet started,” said Bill Adams, chief economist at Comerica Bank, adding that the drop in shelter prices, which typically account for about one-third of inflation, should help drag down overall inflation next year. “In other words, homebuilders targeted lower price points in April to fill order books in the month.”
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