The looming US debt ceiling deadline, when the Treasury can no longer pay the government’s bills without raising the limit, has been predicted to arrive no earlier than June 1. While this is welcome news for investors, it has also created complacency around market volatility, as seen by the CBOE Market Volatility Index (VIX) trading below 18 on Friday. The decrease in expectations of future stock market volatility has been attributed to several factors, including declining bond yields, solid Q1 corporate profits, and steady US economic growth. This has led to increased vulnerability to financial instability concerns and shocks near term, including the debt ceiling.
The debt ceiling deadline has set a worrying precedent for investors, following the 2011 debt limit crisis that led to a stock slump, with the S&P 500 falling 19.4% within several months. In the current economic climate, with central banks tightening policy, Goldman Sachs sees little progress for stocks and expects a range-bound market. The government’s ability to keep the engine running is critical to preventing the US from skirting a recession, with consumer spending still accounting for 68.5% of the economy. However, investors are not expected to react to the debt talks until the deadline draws even closer.
Investors are anticipating April’s retail sales reports, to be released next week, to determine the state of consumer spending in the US, which could be affected by debt negotiations. Deutsche Bank predicts a 0.7% month-over-month growth, and Credit Suisse forecasts an estimated 0.6% growth for April. Several companies, including Target, TJX, and Walmart, are also scheduled to release their quarterly financial reports.
Over the course of next week, New York Fed President John Williams is scheduled to speak twice, while Federal Reserve Chairman Jerome Powell will sit down for a talk with former Federal Reserve Chairman, Ben Bernanke, at a central bank gathering in Washington on Friday.