Good Friday AM,

The only real data out today of any meaning was Consumer Sentiment and it stunk up the place. Consumer Sentiment 57.7 vs 63.0. I would have expected bonds to rally further but that is not the case, and as it happens often when we trade to the limit of a channel without breaking through, we are destined to reverse and head to the other end of the channel. In this case, yields dropped to the bottom of that channel and now are bouncing back a bit with the 10-yr at 3.45%.

For the week, rates are improved, and more improvement is to come.

A quick recap from Wednesday and yesterday. The U.S. economy showed fresh signs of cooling, with a reading of supplier inflation moderating and applications for unemployment benefits rising. The producer-price index, which generally reflects supply conditions across the economy, increased 2.3% in April from a year earlier, the Labor Department said Thursday. That marked the slowest pace since January 2021 and an easing from March’s 2.7% rise.

Softening supplier inflation can signal a future easing of consumer prices.

I guess we should turn our heads to the trainwreck happening in slow motion in Washington with the debt ceiling. I can see this can getting kicked down the road past the June 1 deadline. I am not convinced that June 1 is an actual deadline as the Treasury Department can be slippery when it comes to accounting but should we run out of money and not pay our bills on time, interest rates are likely to jump.

President Joe Biden and House Speaker Kevin McCarthy have postponed their Friday meeting on the debt ceiling, leaving their aides to continue negotiations in a sign that staff level talks are yielding progress. The Biden-McCarthy meeting is said to be pushed back to next week. Staff level talks have been underway on government spending, following the Tuesday meeting between Biden, McCarthy and other congressional leaders. An agreement on spending could clear the way for a deal to raise the US borrowing limit. Meanwhile, Treasury Secretary Janet Yellen told Bloomberg TV the only good outcome would be to raise the ceiling.

Bloomberg had a good piece on the debt ceiling as well.

As the US debt ceiling deadline gets closer and closer, signs of alarm are starting to spread across markets. JPMorgan’s Dimon revealed his bank has a war room already set up to prepare for further turmoil. He also urged Republicans to ignore Donald Trump’s calls to permit a default in pursuit of their goals. President Joe Biden’s meeting scheduled for Friday with House Speaker Kevin McCarthy was postponed as staff continue to negotiate. Americans are left to ponder what Treasury Secretary Janet Yellen’s options are if no deal comes by June 1 and the government starts to run short of cash.

Federal Reserve Bank of Chicago President Austan Goolsbee said a protracted showdown will make the central bank’s job much harder as it tries to assess the impact of bank-sector turmoil, which he said is leading to tighter credit conditions. The International Monetary Fund weighed in, warning of “very serious repercussions” for the US and the global economy if the nation defaults. Potential consequences include higher interest rates and broader instability. The worry for investors is things may need to get much worse before politicians will be driven to make things better. That’s the view from former Biden administration economic adviser Daleep Singh. “Market stress” is needed to allow for compromises in Congress, Singh says. A shock akin to 2011 — or even worse — may be needed, according to Sushil Wadhwani, a veteran hedge fund manager. Current and former leaders of the Treasury Borrowing Advisory Committee wrote to Yellen to say the costs of the standoff extend beyond markets to the time that financial firms are having to spend preparing for a possible default. For storied fixed-income manager Bill Gross, the whole “ridiculous” mess means it’s a good time to buy T-bills at elevated rates. Speaking of the absurd, the cost of insuring Treasuries against default now eclipses some emerging markets, including Greece, Brazil and Mexico.

Please remain safe and stay healthy, enjoy the weekend and first, make today great!