5 Things You Need to Know to Start Your Day

Fitch threatens to downgrade the US’s credit rating, the Federal Reserve signals a pause in June, Nvidia blowout results buoy chipmakers. — [View in browser]( [Bloomberg]( Fitch threatens to downgrade the US’s credit rating, the Federal Reserve signals a pause in June, Nvidia blowout results buoy chipmakers. — [Liza Tetley]( Credit watch Optimism coming from House speaker Kevin McCarthy over the US debt ceiling impasse has not stopped the US from being put on credit rating watch, with [Fitch Ratings warning the nation’s AAA rating is under threat](. The rating agency said it may downgrade its assessment given the fast-approaching so-called X-date, though it said it still expects a deal. That came just hours after [McCarthy said there was still time to reach an agreement,]( having concluded a four-hour meeting with his and President Joe Biden’s hand-picked negotiators. June pause [Federal Reserve officials have signaled they are leaning toward a pause in interest rate hikes at their June meeting](, but aren’t ready to call time just yet. Minutes from the early May meetings released yesterday showed policymakers are still uncertain on how much more tightening may be needed to rein-in stubborn inflation. They are weighing this against the likelihood of a credit crunch following the banking turmoil in March and ongoing wrangling in Washington over the debt ceiling, which could trigger a wave of instability that dampens hiring and investment. AI frenzy [Nvidia, the world’s most valuable chipmaker, has posted bumper forecasts that shine a light on how AI can reshape the sector.]( Its sales in the three months ending in July will be $11 billion, the company said, while analysts estimated $7.18 billion. Nvidia’s CEO told analysts that a trillion dollars of data center infrastructure will be upgraded to handle generative AI tools such as ChatGPT. Shares rose about 25% in US premarket trading, as traders see Nvidia is benefiting from the AI frenzy more than thought. Tech binge Tech futures are leading the charge upwards after those Nvidia results. Contracts on the tech heavy Nasdaq are up 1.8% as at 5:26 a.m. in New York, while S&P 500 futures are also climbing, up 0.6%. Treasury yields are on the rise as appetite flows into stocks and concerns over the US debt ceiling continue to weigh particularly on shorter-dated securities. A measure of the dollar is strengthening, while oil prices are seeing their first day of declines this week. Gold prices are creeping higher. Coming up… There’s two Fed speakers today — Barkin at 9:50 a.m. and then Collins at 10:30 a.m. On the data front, we’ve got jobless claims and first quarter GDP coming at 8:30 a.m. Then we’ll get US April pending home sales at 10:00 a.m. and EIA US natural gas storage change figures at 10:30 a.m. At 11:30 a.m. the US will sell $35 billion 4-week and $35 billion 8-week bills, and another $35 billion 7-year notes at 1:00 p.m. Earnings today include Costco, RBC, TD Bank, CIBC, Best Buy, Medtronic, Marvell, Ralph Lauren, and Gap. Will S&P 500 rally or slide? How long before the index climbs back to its 2022 peak? Will value stocks will outperform growth? Or, maybe, it's time to look past stocks and into alternatives? Share your views in our latest [MLIV Pulse survey](. What we’ve been reading Here’s what caught our eye over the past 24 hours: - [Ron DeSantis’s campaign launch on Twitter causes the platform to briefly crash]( - [Germany enters its first recession since the start of the pandemic]( - [A limp China recovery is crushing commodity prices and equity markets globally]( - [European chipmakers jump on Nvidia stellar forecast](bbg://news/stories/RV7CIRDWLU68) - [British consumers are set to see a big drop in energy bills]( from July - [Adidas looks to fill the billion dollar hole left by end of Yeezy]( collaboration - [France’s ban on short domestic flights is riddled with exceptions](bbg://news/stories/RV7DG2TP3SHS) And finally, here’s what Joe’s interested in this morning Nobody knows the exact Debt Ceiling "X-Date", we just know that every day without a deal we're moving one day closer to it. What happens then? Nobody can really say. All we really know for sure is that for a long time The White House was insisting it wouldn't negotiate over hiking it and... now it's negotiating over it. So how did The White House end up in this situation? That was the subject of [yesterday's Odd Lots episode](, with [Skanda Amarnath]( and [Arnab Datta]( of Employ America. The simple answer? Basically a failure several months ago to plan for contingencies. When the Republicans won the House of Representatives, and in particular when Kevin McCarthy needed 15 rounds of voting to secure the speakership, it became instantly obvious that debt ceiling scenario would be highly uncertain at best. Presumably The White House could still have insisted on a clean debt ceiling increase, while taking risk management precautions in the event that a clean debt ceiling increase was not forthcoming. One possible path here would have been to lay the groundwork to issue consols -- interest-only bonds that have zero face value -- and thus by the letter of the law don't add to the debt ceiling. But per Skanda and Arnab, this is the type of thing that takes planning. It takes software coding. It takes communication with primary dealers and so forth. As they note, [in January 2020]( Steve Mnuchin announced the launch of a 20-year, but that was only after years of study and months of prep. Because that prep didn't (as far as anyone knows) begin after the November elections -- when the debt ceiling risk became obvious -- The White House doesn't have a credible alternative to negotiations. Having trashed other options like minting a platinum coin has also weakened The White House's position, giving leverage to McCarthy et. al. There's another dimension of yesterday's conversation that's really important for people to appreciate. There's a lot of talk about "Invoking the 14th Amendment" which people talk about as if it's something simple like "Pleading the 5th". But while the 14th Amendment compels the government to honor its debts, it's not a verb. Instead, as [Tracy Alloway]( put it, it's more like a frame of mind. It creates an obligation on the part of the Executive to find a way to continue debt service, even if the debt ceiling isn't hiked. In other words, it's not "14th Amendment vs. The Coin" or "14th Amendment vs. Consols" it's that the 14th Amendment is why The White House needs to find some workaround, in the event that the debt ceiling isn't hiked prior to running out of money. Which brings us to "prioritization". The idea here is that if the debt ceiling is hit, then what will happen is we'll have something akin to a government shutdown, where the Treasury keeps making interest payments, but starts not making other obligations. This might happen. But it should be understood that this is deeply problematic, and raises all kinds of constitutional/separation-of-powers issues. In a normal government shutdown, there's a blueprint for what gets shutdown and what doesn't. EG, the National Parks and the Department of Education might cease operations, but the Department of Defense keeps going, and Social Security checks keep going out. There's a known difference between mandatory spending (on defense and entitlements) and discretionary spending that is regularly re-appropriated. But in a payment prioritization environment, that's all out the window. Suddenly the President must unilaterally pick and choose what payments to keep making, while also conserving cash to pay bondholders each day. In the US system of government, the "power of the purse" resides with Congress. The President isn't allowed to make this-or-that spending decisions. Yet this is precisely what prioritization would entail. And while people might express misgivings about the precedent of some unusual debt ceiling end-runs (like the coin), there's a potentially dangerous precedent that will be set if it's established that once the debt ceiling is hit, suddenly the President gets all kinds of powers to pick and choose spending priorities. Meanwhile, it's safe to assume that if prioritization happens, lawsuits are going to fly from groups that are not getting paid their Congressionally-mandated appropriations. [The whole conversation is definitely worth listening to](, to understand the bad options ahead, and why the bad options are available, because The White House and Treasury didn't plan for better options. Meanwhile, [today on Odd Lots](, we speak with Slack (and Flickr) co-founder Stewart Butterfield about software, tech, the VC boom, AI etc. And while this may seem like an awkward segue for this newsletter, Butterfield is a *long time* supporter of minting the trillion dollar coin, and we talk about that also on the show at the end. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. Want to sponsor this newsletter? [Get in touch here](. You received this message because you are subscribed to Bloomberg's Five Things to Start Your Day: Americas Edition newsletter. If a friend forwarded you this message, [sign up here]( to get it in your inbox. [Unsubscribe]( [Bloomberg.com]( [Contact Us]( Bloomberg L.P. 731 Lexington Avenue, New York, NY 10022 [Ads Powered By Liveintent]( [Ad Choices](