Wall Street Breakfast Podcast: Debt Deal Heads To Vote

The debt ceiling deal moves towards a vote in Congress, what’s next for stocks and bonds with the tail risk of default almost gone and Salesforce (NYSE:CRM) is expected to join the AI bandwagon as it reports results this week.

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Transcript

Leading today’s news – Investors got some closure over the long weekend, not just with the last episode of Succession, but also with a debt limit agreement by the leadership of both parties.

Now it’s up to the House and Senate to vote on the bill. The X-date when the Treasury would run out of cash to pay its obligations has been pushed to June 5, giving lawmakers a little more breathing room.

Deutsche Bank’s Jim Reid says there’s not much room for error “but with moderates on both sides seemingly in line, then there can be a vocal minority on both sides against the deal and it still passes.”

What’s in the deal:

The agreement lifts the current $31.4 trillion deal ceiling into 2025, meaning the limit on government borrowing would be extended until after the next presidential election.

Non-defense spending will be capped at current levels for the next fiscal year, and rise by 1% in 2025. Congress would also need to approve 12 annual spending bills or risk facing a snapback to spending limits from the previous year.

Other changes that were central to the compromise include limiting some food stamp provisions to encourage recipients to find jobs. The agreement also halts some funds to hire new IRS agents, claws back billions of dollars in unspent COVID relief and would speed up big energy projects. In addition, a pause on student-loan repayments will come to an end in August, though Biden’s student loan forgiveness plan will end up being decided by the Supreme Court.

The measure will be taken up this afternoon by the House Rules Committee, which will determine the framework for considering the legislation before a vote takes place in the House on Wednesday. If approved, a decision in the Senate would follow, and could happen by the weekend.

In other market news – Stocks are set to open higher following the news of a debt deal.

Stock index futures are up, with the Nasdaq 100 (NDX:IND) (QQQ) futures doing the best. S&P futures are up about a third of 1 percent.

Overall it looks as if an eventual agreement to avoid default was already priced into equities.

More action is expected in the bond market, especially the short end of the Treasury curve. The 2-year yield (US2Y) (SHY) is down 8 basis points to 4.52%. The 10-year yield (US10Y) (TBT) (TLT) is off 5 basis points to 3.72%.

Strategists are looking for yield to gradually climb higher barring a surprise no vote.

Paul Donovan, chief economist at UBS says: “There is the normal posturing by politicians, but markets are optimistic that political extremists will be kept at bay and the deal will pass.”

ING fixed income strategists say that the removal of the tail risk of default – even if the chance was tiny to begin with – will “allow markets to focus on the more important debate” of whether the Fed is done with its hiking cycle.

Fed funds futures are now pricing in a 60% chance that the FOMC will raise rates by 25 basis points in June after Friday’s hot inflation data. The odds then move to a likely cut by November.

“US rates will quickly look past the deal and turn their attention to the Treasury’s task of rebuilding its cash buffer at the Fed,” ING added.

They say two aspects matter:

“On the liquidity front, money markets can expect a $500 billion drain over the coming months as more debt is issued. In a context of $95 billion/month Quantitative Tightening (QT) and of likely tightening of at least some banks’ funding conditions, this should amount to an additional drag on financial conditions for the broader economy.”

Tighter conditions could weigh on stocks, which are now more reactive to a possible recession than a Fed pause.

Drivers saw lower prices at the pump over the Memorial Day weekend. Gas as about $1 per gallon less than at the same time last year, driven by weak demand for fuel and low oil prices.

Nationally, a gallon of gas averaged $3.57 on Friday, according to triple A, down from $4.59 a year ago. About 3 million more people were expected to travel over the long weekend than in 2022.

Unlike many previous summers, U.S. motorists are unlikely to see significant price changes any time soon. That’s because of weak demand and accompanying recession worries.

“It’s very difficult for oil to rally if the majority of folks in the financial community – speculators, investors – think there is going to be a recession,” Tom Kloza, OPIS head of energy analysis, told The Wall Street Journal.

WTI Crude (CL1:CIM) (USO) is lower by about 1.5% early on today, back below $72 per barrel. It locked in gains last week for the second week in a row.

Looking to earnings, Salesforce (CMR) reports its results on Wednesday.

Wedbush Securities says the company is likely to show “increased deal stability,” citing recent checks.

“While the macro is not roses and rainbows and CRM is still battling through various headwinds, overall we saw stronger cross-sell activity this quarter and particular strength out of the Tableau front,” analyst Dan Ives wrote in an investor note.

Ives has an Outperform rating on Salesforce. He also noted that the company is likely making “major strides” to integrate Slack into its broader software and customer relationship management software suite, which could fuel “major collaboration deals.”

Salesforce has undergone a number of cost cutting measures in recent months, spurred by interest in activist shareholders, but Ives says he believes that is largely finished and the company’s margins should benefit as a result as it balances growth and profitability.

Artificial intelligence is still the hot topic and Ives is expecting more from Salesforce on that front, as it looks to monetize the technology with its “massive installed base.”

Other market headlines to watch for on Seeking Alpha:

Nvidia (NVDA) set to join the $1 trillion market-cap club

Rolls-Royce rebuffs a report that it is considering cutting thousands of jobs

HP Q2 2023 earnings on deck, what to expect

‘Scrappier’ Meta looks to pivot to the future

Synopsys strengthens AI collaboration with Arm

Drug pricing watchdog raises alarm over upcoming liver disease meds

On Tuesday’s economic calendar – The S&P Case Shiller House Price Index hits at 9:00 a.m. ET. At 10:00 a.m. the Conference Board releases its measure of May consumer confidence.