Recently, a deal was proposed between Democrats and Republicans to suspend the debt ceiling until 2025. This deal includes measures such as curbing nondefense spending, implementing welfare work requirements, and energy permitting, to avoid default on government obligations. It’s important to note that despite the current debt ceiling issue garnering attention, similar situations have occurred before and will likely happen again. These past debt ceiling standoffs have only had temporary impacts on the market, despite generating significant political noise. The deal still needs to be passed by Congress, although Treasury Secretary Yellen has extended the deadline to June 5. Latest reports indicate that the deal is on track to pass both houses of Congress.

Although the debt ceiling issue is almost resolved, inflation remains a prevalent concern. Recent media reports suggest that the decline in grocery prices will help reduce inflation expectations in the upcoming months. Food prices are anticipated to rise at a slower rate throughout 2023 compared to last year. The U.S. Department of Agriculture has predicted an 8% increase in grocery costs for this year. From March to April, food prices increased by 0.35%, which is lower than the 0.54% increase between February and March. Supply chain normalization is among the main reasons for the reduction in grocery inflation. However, Investors should focus on core inflation as it is a crucial indicator of what the Federal Reserve Bank will decide to do with the Fed Funds rate during the June FOMC meeting. Food and energy prices are excluded from the Core Inflation calculation as their prices are typically too volatile or fluctuate significantly.

Another misleading indicator is corporate profits have declined for the second consecutive quarter. In the first quarter, there was an overall decline of 5.1%, and compared to the same period last year, profits were down by 2.8%. Although this may seem significant, the markets still responded positively. We believe that this decline is a normalization of corporate profits to pre-pandemic trends. Companies like Proctor & Gamble, which sells essential household items, were able to hike prices with little pushback in response. In the June Federal Open Market Committee meeting, we believe that the Federal Reserve bank will not raise or increase the Fed Funds Rate. However, based on inflation indicators, a rate hike will be on the table in the July Federal Open Market Committee meeting if inflation stays elevated. 

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