Waiting Game: Debt Ceiling Drama to resume, Inflation in focus

• Dollar slightly stronger ahead of President Biden’s pivotal meeting with congressional leaders
• NFIB report shows sentiment plunges to weakest levels in a decade
• Wall Street is hoping lawmakers won’t have to resort to a short-term debt limit extension

US stocks are mostly lower ahead of what will be the start of a lengthy debt ceiling negotiations and ahead of inflation report that should shows the disinflation process is struggling.  No one is expecting any meaningful progress with President Biden’s meeting with congressional leaders.  House Speaker McCarthy and President Biden will likely draw their red lines and try to signal a willingness to work with the other side.

Considering the limited market stress that we are seeing, it doesn’t seem like anyone is going to make any small concessions. The best-case scenario is that the White House meetings pave the way for lawmakers to agree upon a few hundred billion or more in spending cuts.  A deal will likely get done over the next few weeks and optimism should remain that talks will continue later this week. 

The April CPI report is going to remind everyone that inflation is staying sticky. The Fed won’t be raising rates on a hot report, but it will justify calls that rates will stay higher for longer.

NFIB

Small business optimism tumbled to the worst levels in a decade as the Fed’s aggressive rate hiking campaign has forced companies to ease up on business investments.  Sentiment is rather weak over debt ceiling uncertainty, a weakening consumer on sticky inflation, and as recession risks remain elevated. High-interest loans are about to cripple small businesses and that could be a harsh reality over the next year.  Too much of Wall Street is convinced that the Fed will begin an easing cycle before year end and that might not be what happens. 

USD

The dollar gained as investors gravitated towards safety ahead of debt ceiling talks and on expectations economic weakness would persist give sticky inflation.  The Fed might be done raising rates but the market is still too aggressively pricing in rate cuts.  Expectations for inflation to be sticky going into the summer and for a last minute debt deal could lead to a stronger dollar.  The dollar is stronger against the euro as the daily chart shows price action is struggling to break above the highs made in early February. It appears the 1.11 price barrier is holding up and if prices remain heavy, bearish momentum could target the 1.0850 region.

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