Top-Level Takeaways
- Financial markets are in a bit of a holding pattern, sandwiched between the recent banking upheaval and the looming debt ceiling negotiations.
- Recent data suggest a resilient U.S. consumer and persistent inflation pressures.
- The date at which the Treasury will run out of cash remains fluid, with recent guidance suggesting it could come as soon as June 1.
Where do we go from here?
Financial markets remain in a mercurial state. Although general bank fears have eased in recent weeks, there are still lingering risks (see First Republic Bank). The Fed announced a 25-basis-point rate hike at the May 3 FOMC meeting, but will that be the last hike of the current cycle? If so, when will the Fed make its first cut?
The answers to these questions rely on a multitude of factors, and one major factor is the looming debt ceiling deadline. Beyond current banking troubles and the debt ceiling, there are also worries about a shift in the Bank of Japan’s ultra-accommodative polices that, depending on the timing and pace, could spark a large-scale repatriation of Japanese institutional investments abroad. Could the Fed’s aggressive tightening and consequential volatility cause another shoe to drop in another sector — such as leveraged loans, CRE, etc.?
To be clear, none of these risks might come to fruition, and the U.S. economy can still theoretically achieve the ideal soft-landing scenario. However, the heightened uncertainty in financial markets right now is palpable, and general risk appetite is subdued. Some have characterized this as a market in limbo; others, in a more sensational sense, have referred to it as the eye of a hurricane.
General economic fundamentals remain relatively sound for this point in the business cycle. Unemployment is still holding at nearly a 55-year low, and although GDP growth has fallen below trend in the past year (due in large part to price pressures), consumer spending has proven resilient. In the first quarter GDP report, overall growth was weaker than expected at 1.1% quarter-over-quarter (annualized), but personal consumption rose 3.7%, slightly below expectations but the best quarterly rate since the spring of 2021. Consumption has shifted in recent quarters from big-ticket goods to services and consumer staples, effectively a reversal of the pandemic trend. In short, rumors of the consumer’s demise were greatly exaggerated, to butcher a famous Mark Twain line.
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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.