Aoifinn Devitt – Chief Investment Officer
We are often told to listen to the bond market as the “truthsayer” when it comes to the actual state of the US economy and its outlook. This refrain is heard when the yield curve inverts or when the demand for short-dated government bonds tops that of longer dated ones. At times in the current cycle, the bond market has seemed blinkered to the actions and statements of the Fed; at times, it has fallen into line. Well, the bond market is talking once more – this time shedding light on the potential crunch around the federal debt ceiling. In recent days, demand for very short dated T-bills (one month) has surged, while that for three month bills has fallen. This suggests that there is real concern around the problem of the debt ceiling a lot sooner than markets had previously anticipated – i.e. one to three months from here.
As tax numbers trickle in, it is clear that what was a devastating year for financial assets (2022) wiped out many capital gains, while tax loss harvesting may have also contributed to shaving the tax haul. With news of presidential runs starting to heat up (President Biden just announced that he will run again) and a competitive field already in place on the Republican side – political posturing will be a factor in seeing how the negotiations go. This comes against a backdrop of an earnings season that is laced with caution, so markets are likely to be fraught. The slightly flatter employment numbers and evidence of both housing starts and existing home sales coming in below expectations are evidence that some of the froth is out of the hard data – finally. So, it looks like the summer ahead will be tense.
As the dance around the debt ceiling continues, tech stocks have taken a breather from their storming start to the year, but markets overall remain relatively calm as earnings trickle out.
We have seen evidence of real bifurcation in the fortunes of banks, with First Republic Bank shares tumbling after it announced losing over $100 bn in customer deposits during the first quarter of the year, while other, larger institutions have seen deposit inflows. This herding in banks deemed “too big to fail” may create further problems, but for now the chips are continuing to fall among the rest of them. The final shuttering of a big box behemoth – Bed, Bath and Beyond, will leave hundreds of vacant sites across the country as yet another reminder of the changing shape and nature of retail. As ever in 2023, there remains a lot to digest as the year nears its midpoint. It is no wonder few investors feel like dancing.
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