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Debt ceiling talks set to intensify, JPMorgan expects a Fed cut by September, and Wall Street banks scale back China plans. — Liza TetleyTal [View in browser]( [Bloomberg]( Debt ceiling talks set to intensify, JPMorgan expects a Fed cut by September, and Wall Street banks scale back China plans. — [Liza Tetley]( Ceiling talks Talks between[President Joe Biden and House Speaker Kevin McCarthy over the debt ceiling]( -- launched before Biden’s departure for a shortened trip over to Asia for the G7 meetings -- are set to intensify as negotiators seek a framework agreement to review upon the President’s return. They struck a cautiously optimistic tone on Tuesday during a meeting, after which Biden said “there was an overwhelming consensus…that defaulting on the debt is simply not an option.” The president said he’d be calling to check in on the status of talks during his time abroad. Fed bets [JPMorgan says the market is right to be pricing in rate cuts by the Federal Reserve](, seeing a US recession as a virtual certainty. Seamus Mac Gorain, head of global rates in London, says recent banking woes have heightened the risk of a recession, and that the Fed may lower its key rate as soon as the third quarter. The Fed has repeatedly pushed back against bets that a policy pivot could come as soon as September to counter slowing growth, meaning such bets could backfire if officials maintain a restrictive stance to subdue inflation. Scaling back Goldman Sachs and Morgan Stanley are [among banks scaling back expansion plans and profit goals in China](, as relations with the US sour further and President Xi Jinping’s willingness to sacrifice economic priorities for security concerns rocks the private sector. Drastic jobs cuts are being eyed at the biggest US banks with presence in China. “Global banks are vulnerable to political actions that could inflict material financial harm,” said finance professor Mark Williams at Boston University. Dollar gains Futures on the S&P 500 and Nasdaq are climbing, up 0.2% and 0.1% respectively as at 5:15 a.m. in New York. Treasuries are treading water, while a measure of the dollar is strengthening. Oil drops a second day edges amid concerns over demand in China and expectations of rising stockpiles in the US. Iron ore continues its week in the green, while gold declines. Coming up… We’ll get MBA mortgage applications at 7 a.m., followed by April housing starts and building permits at 8:30 a.m. After that, there’s the EIA US crude inventories data at 10:30 a.m. At 11:30 a.m. the US will sell $39 billion 17-week bills, followed by another $15 billion 20-year bonds at 1 p.m. The Senate Banking Committee is due to hold a hearing on accountability at the Fed at 2:30 p.m. The House panel will hear testimony from former regional banking executives. Earnings include Target, Cisco, TJX, and Cisco Systems. What we’ve been reading Here’s what caught our eye over the past 24 hours: - [Barclays is ramping up its Paris headcount](bbg://news/stories/RUHXR8DWLU68)in a post-Brexit push - [Microsoft’s Nadella disputes Elon Musk’s claim that the company controls OpenAI]( - Making a [classic Italian pizza is getting pricier even as energy and tomato costs ease]( - [Quick-fix solutions in the race against heat is adding to the problem of global warming]( - The [tussle for global influence is about to intensify]( - [Sellers are slashing prices in the UK’s luxury housing market]( - [Cancer drug shortages are approaching record levels in the US](bbg://news/stories/RUSJGUTVI5MO) And finally, here’s what Joe’s interested in this morning Housing activity is getting hot again. But things are going less well for Home Depot. The retail giant fell over 2% yesterday after cutting its outlook on weaker sales. [As Olivia Rockeman reports](, the bigger-ticket, consumer-discretionary items were particularly weak for the company. Things like grills, patio sets, and various home improvement projects are where the weakness is found right now. Seeing that grills were a weak spot reminded me that we had a bit of a grilling bubble in the middle of 2021. Here's a chart of Traeger, a maker of pellet smokers, which IPO'd that summer. You could tell a whole story from this chart alone. IPO window opens up in a crazy way in 2021, giving the management of this company that was founded in 1985 a great chance to monetize some of their holdings. And then, just like a bunch of crypto or electric car charts that came public at that time, it starts to go down immediately. You could end the story there, but there's much more to it than a capital markets story. A look at COOK (Traeger's ticker) tells you a lot about real economy trends and mistakes that were made over the last three years. The story starts with absolutely insane growth, which didn't prove to be sustainable at all. Here's a slide from the company's [latest earnings presentation]( showing how Q1 revenue absolutely exploded from Q1 2020 to Q1 2021, before moderating in Q1 2022, and then totally falling off a cliff in Q1 2023, as things reverted back towards pre-pandemic levels. We talk about this with tech a lot, where the pandemic saw some huge step change in the pace of consumption or growth (Think Netflix) and investors and management started betting on this as a sustainable new trajectory. A new paradigm kicked off by the pandemic. Decades of growth in years. Instead it was idiosyncratic. For a long period, thanks to extended time at home, a high wealth effect, and maybe stimulus checks, a lot of people went out and bought grills and smokers. Sales went to the moon. And then they collapsed from the moon. And just as investors got caught up in it, management also made mistakes during this period of time, by not being able to identify which trends were temporary, and which were durable. If you read the company's first earnings transcript, for Q2 2021, it's all about optimism and growth. Here's CEO Jeremy Andrus: "With tremendous opportunities in front of us, we continue to disrupt outdoor cooking industry." The company's CFO Dominic Blosil was similarly optimistic as of Q2 2021, though it did acknowledge some supply chain challenges. "Gross profit margin was 39.1% in the second quarter, decreasing 440 basis points from the same period last year. The decrease in gross margin was largely due to increased inbound transportation costs, inflationary pressures on commodities, and appreciation of the Chinese renminbi relative to the US dollar. We view many of these headwinds in gross margin as transitory, and we are implementing measures to navigate these global supply chain challenges, which I will speak to shortly. Despite these measures to navigate these global supply chain challenges, -- I'm sorry, despite these unprecedented macroeconomic challenges, the fundamentals of our business are strong. Consumer demand is growing. Customer engagement remains high, and we are driving higher ASP in customer and lifetime value. Sales and marketing expenses increased by 125% to $47 million, compared to $21 million in the second quarter of last year." Ok, so all good except some supply chain issues. Fast forward a year to Q2 2022 and things sound extremely dire. Not only is there softening in the grills category by this point, but it's on a scale they have never seen before. Here's CEO Andrus again: "First, we believe that after a 2-year period of accelerated spending in home-related and durable goods, the consumer is shifting discretionary expenditures towards experiences. This shift is driving strong growth in demand in sectors such as hospitality and travel at the expense of goods like grills, appliances and furniture." And then here's the stunning comparison from Andrus. Not only are sales collapsing, but they make The Great Financial Crisis decline look like Child's play. From Andrus: "The combination of declining consumer sentiment and the spending shift away from durables in the face of heightened comparisons is driving an unprecedented decline in the grill category. To put this into perspective, during the 2008 to 2009 great financial recession, the grill category was down in the low double-digit range. We believe the grill category is down to below 20% range year-to-date through May on a revenue basis, and down in the 30% range on a unit basis. This is the largest decline in the grill category that we have seen in our data sets." Of course, the bullwhip effect was in full play at this point. In addition to end-user demand falling off a cliff, the company's retail channel partners had wound up with too much inventory. Compounding the issue of lower-than-planned sell-through are heightened levels of inventory at retail. In an effort to ensure adequate stock given the volatility in the supply chain environment over the last 2 years, our retail partners have been replenishing product more aggressively and holding more inventory than is typical. As sell-through of our grills missed forecast in the peak selling season, in-channel inventories increased to levels greater than we target. Higher inventories in combination with a slowing macroeconomic backdrop and the specter of recession have led to a sharp shift in retailers' ordering behavior. Often referred to as a bullwhip effect, our retail partners are now heavy on inventory in our product category which is negatively impacting our replenishment order activity for the second half of the year. And it wasn't just sales volatility that characterized the last three years. The mistaking of new trends for sustainable ones affected corporate decision making. On July 18, 2022 (just 8 days after that Q2 earnings report) [announced a restructuring plan](, cutting 14% of its headcount and while canceling a planned "nearshoring effort" to manufacture products in Mexico. You can imagine during the peak of the boom and the supply chain stress why a fast growing seller of manufactured products felt compelled (as many people were talking about) to move more production away from China. It was a big talking about. But as the world normalized over the coming years, with supply chains and sales easing, such expansion plans proved to not to be justified. The company also overhired during its boom. [In its S1 filing from July 2021](, the company said it had 700 employees. By the end of 2021, it had 875 ([according to its first 10-K]() a 25% increase just that year. Again, when we think of pandemic-related distortions, we think a lot about Netflix and e-commerce, and other areas that saw insane growth out of the gate, causing companies to hire too fast, mistake that growth for something sustainable, and then ultimately have to unwind. But we saw it in the grill world as well. Historic growth. An IPO. Rapid hiring around sales and administrative positions. A planned factory in Mexico to "near-shore" production and avoid supply chain stress. A historic growth collapse. Layoffs. And a canceled new investment plan. For at least a certain category of business, there's the story of the economy over the last three years. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart. Follow Us Like getting this newsletter? 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