What Will the Fed’s Updated Dot Plots Signal to the Market?

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Headline risks on the debt ceiling will drive markets
  • Focus will soon shift to The Fed’s updated dot plots
  • Inflation trajectory is still on a solid downward path

As we head into Memorial Day weekend, the unofficial kick-off to the summer, the Investment Strategy Group would like to honor and remember all the fallen men and women in our armed forces who sacrificed their lives for our country. Whether you visit a cemetery, hold a family gathering, attend a parade, head to the beach, or barbeque with friends, enjoy spending time with your loved ones. And this year is shaping up to be a busy one! AAA is forecasting 42 million will travel by road, air, or other modes of transportation this Memorial Day weekend – a 7% increase over last year’s levels. In fact, summer travel is closing in on pre-pandemic levels, with this year’s volume expected to be the third highest in the last twenty years – largely led by air travel. While summer vacation or staycation plans are on everyone’s minds, there are plenty of important market-moving events to stay on top of this summer that have the potential to shape the directional outlook for the financial markets in the months ahead. Some of these include:

  • The dog days of the debt deal | Despite positive momentum at times, a debt ceiling deal remains elusive as the two sides have yet to reach a compromise on lifting or suspending the $31 trillion debt limit. Once again, the negotiations are likely to extend into the eleventh hour before an agreement is reached. While the issues are getting worked out, the main sticking point is centered on future discretionary spending – more specifically, what baseline to start from (i.e., FY22 or FY23) and the duration the spending caps will remain in place. With only a week to go before we cross Treasury Secretary Yellen’s early June x-date deadline, concerns about the debt ceiling and the potential of a U.S. default are rising. Fitch just placed the U.S. on watch for a downgrade from its AAA status given the ongoing brinkmanship and there have been further dislocations in the Treasury bill market. In fact, the Treasury’s new 21-day cash management bill maturing on June 15 sold with a yield of 6.20% at auction – significantly higher than other nearby maturities. Expect headline risks to persist until a final agreement is in place, with a deal likely to come in the final hours (we hope!).