Wall Street Breakfast Podcast: Liquidity Squeeze
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Liquidity worries arise as debt ceiling deal easily passes the House, Meta threatens to pull news from California and is the AI boom starting to show cracks?
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Transcript
The House of Representatives voted Wednesday night to easily pass its debt-ceiling relief deal.
The vote total was 314 for and 117 against. Republicans voted for the bill by a 149-71 margin, while Democrats approved with a 165-46 vote.
After emerging from committee Tuesday and procedural votes earlier Wednesday, the debt-ceiling bill was the subject of closely watched comments from representatives on both sides of the aisle.
Plenty found much to dislike with the compromise, but now the measure is set to go to the Senate. Senators are also working under a tight timetable and preparing for weekend votes. A number of senators have expressed the wish to amend the bill, but any successful amendments mean it would be set to return to the House for more approval, also threatening the deadline that could bring default.
Today was supposed to be the X-date – or the date when the Treasury could no longer fund its obligation. But that was pushed out June 5.
Still, the amount of money the Treasury has to pay its bills is now at the lowest level since 2017. And any hitch in passing the debt ceiling agreement in Washington could bring default back to forefront.
The Treasury cash balance dropped to $37.4 billion on Tuesday, Bloomberg reported, citing the latest available data. It will go ahead with auctions of 1-month and 2-month bills today, and also an unusually short-dated bill to give it more wiggle room with the debt ceiling.
If everything goes as planned with the passing of the agreement, investors still aren’t out of the woods though. Part 2 of the drama will come with a huge squeeze on liquidity as the government looks to replenish the Treasury General Account from below $50 billion to above $650 billion.
As the Treasury sells debt to raise cash but, not spend it, that could mean a drag on economic growth and the stock market, according to T.S. Lombard economist Steven Blitz.,
So far, liquidity has improved since the end of last year, lending a tailwind to stocks. If that reverses as expected after the lifting of the debt limit, a corresponding reversal in the S&P 500 (SP500) (SPY) could be expected, Blitz says.
In other market news –
When it comes to gaming the Fed, things can change in the blink of an eye.
Yesterday, we highlighted how the markets were pricing in more than a 60% chance that the Fed would hike rates in June given some hotter-than-anticipated data.
This morning the odds have switched back again, with fed funds futures pricing more than a 60% chance that the FOMC will pause next month. That’s the highest odds since May 25.
The chief reason is jawboning from Fed officials, most notably from Philly Fed President Patrick Harker.
"I'm not saying that we're not going to continue to tighten," Harker said, citing sticky inflation, "but I think we can take a bit of a skip for a meeting."
He said: "The Fed doesn't have to hike at every meeting."
The market still expects another hike, with a 65% chance of rates being higher after the July meeting. It’s about 50/50 on any cuts in 2023.
But ING warns that a strong May jobs report and hot CPI could still make a case for June.
Harker speaks again today at 1 p.m. ET.
Meta Platforms (META) is threatening to pull news links from Facebook and Instagram in California if state lawmakers move forward with the California Journalism Preservation Act.
The bill, which is up for a vote in the state assembly on Thursday, would require social media companies that make money from online ads - via the distribution of news articles - to pay a "journalism usage fee" to publishers.
In turn, publishers would have to spend at least 70% of the fee revenue on their newsrooms.
Meta Communications Director Andy Stone says: "We will be forced to remove news rather than pay into a slush fund that primarily benefits big, out-of-state media companies under the guise of aiding California publishers."
The AI boom has been instrumental in the stock rally this year. But some cracks in the buy-AI theme may be showing.
C3.ai (AI) is tumbling more than 20% after reporting earnings after the bell yesterday. The main concern was guidance that was merely in line with Wall Street expectations.
That’s the problem with sky-high expectations in the wake of Nvidia’s (NVDA) guidance and huge gain. C3.ai stock had rallied sharply into the print, with shares more than doubling in May.
Salesforce (CRM) shares are also under pressure premarket, despite an earnings call that was littered with AI references. Executives said there was a “tremendous appetite" for generative AI products Einstein GPT, Slack GPT and Data Cloud.
But traders focused on conservative guidance.
But Robert Schein of Blanke Schein Wealth Management says the market is still sending a “clear signal that artificial intelligence is here to stay” and that the “euphoria is rooted in a very promising underlying technology.”
Other market headlines to watch for on Seeking Alpha:
Ford’s CEO says EV price parity is unlikely until after 2030
SVB’s investment banking unit reportedly attracted only one qualifying bid
Advance Auto Parts crashes on dismal earnings and a big dividend cut
Nordstrom gains after posting an unexpected Q1 profit
Okta raises revenue and EPS guidance
U.S. crude stockpiles rose by 5.2M barrels last week, according to API
Apple says developers generated $1.1 trillion in its App Store ecosystem in 2022
And lastly, Elon Musk regains the title of world’s richest man
On Thursday’s economic calendar –
There’s a double dose of jobs data coming ahead of the big May payrolls report on Friday.
First, ADP reports its own measure of private payroll growth at 8:15 a.m. ET. That’s quickly followed by the weekly jobless claims figures at 8:30 a.m.
Both of those numbers have come under scrutiny recently for their accuracy – ADP has always had a schism with the official figures, but its new methodology has brought in additional criticism. Initial jobless claims now face questions of reliability after a large spike in fraudulent claims.
At 10 a.m., the ISM manufacturing index for May arrives, a crucial number for those concentrating on recession concerns over rates. At the same time, April construction spending numbers hit the wires.
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