What the debt ceiling standoff means for markets

- Also: Job openings in the U.S. cooled — without a spike in unemployment. # # --------------------------------------------------------------- The key takeaways today: - As negotiations around the debt ceiling intensify, we look at how markets are responding - The global housing market is stabilizing faster than expected - And are Americans falling out of love with stocks? Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- The Markets: Are investors pricing in a potential default? 🎙️ Debt ceiling discussions are the primary focus of markets this week, but equity and bond markets are reacting in very different ways. Stocks have been relatively resilient — although they're beginning to show signs of greater concern — as they take comfort from the fact that policymakers have stressed the urgency of reaching an agreement, says Candice Tse from Goldman Sachs Asset Management, Strategic Advisory Services, on [The Markets podcast from Goldman Sachs Exchanges.]( “I think that's the real reason why the markets have really taken the debt ceiling negotiations in stride,” she says. The bond markets, on the other hand, are more wary of the possibility of a default, as evidenced by yields on Treasury bills — particularly those set to mature from June 6th through June 15th — exceeding 6%, she notes. A U.S. default is not Goldman Sachs Asset Management's base case, she says. “I think we get to a short-term agreement that takes us to the fiscal year end and that allows for some more time,” she says. Start your Friday mornings with our new podcast, [The Markets, from Goldman Sachs Exchanges.]( In just 10 minutes or less, we break down the key issues moving markets. Find us wherever you listen to podcasts. --------------------------------------------------------------- The Big Number: Ahead of debt ceiling standoff, corporate bond sales surge 138,000,000,000 Companies have issued $138 billion of U.S. investment-grade bonds in May, pulling forward deals in case the country's debt ceiling uncertainty continues into the summer. “Companies are either proactively pulling forward bond deals or are proactively building war chests,” says Jonny Fine, head of Investment Grade Syndicate in the Americas in Goldman Sachs' Global Banking & Markets business. “We're also seeing a notable uptick in issuance and performance from financial services companies after months of muted supply following the stress in U.S. regional banks this spring.” As a result, May is likely to be one of the busiest months of the year for overall investment-grade debt issuance, already outpacing last year's levels of $96 billion. (Data is as of May 23 and is sourced from Dealogic.) --------------------------------------------------------------- As interest rates climb, the global housing market is surprisingly stable The global housing market seems to be stabilizing faster than expected despite months of rising mortgage rates, according to Goldman Sachs Research. Home prices are defying expectations and rising in major economies such as the U.S., Australia and Canada, our economists Joseph Briggs and Giovanni Pierdomenico write in a new report. Home sales, which also declined with rate increases, are beginning to stabilize too. “A surge in mortgage rates has led to a sharp housing market pullback in most major economies since mid-2022, but the global housing market is showing some early signs of stabilizing,” Briggs and Pierdomenico say. “House prices [are] leveling out more quickly and at a higher level than would normally be expected given the rapid rise in mortgage rates.” [ Read the full story. Â]( --------------------------------------------------------------- Are Americans breaking up with stocks? Money market funds have seen an influx of dollars, often a sign that investors are getting nervous about stocks. At the same time, equity mutual funds have suffered significant outflows. This could suggest that U.S. investors are leaving equities. But that reasoning would be a misconception, explains John Marshall, head of derivatives research for Goldman Sachs Research. The dollars entering money market funds seem to mostly be coming from bank accounts. And since the start of 2019, equity ETFs have taken in more than double what equity mutual funds have given up. Importantly, nearly half of those inflows are coming from individual investors. Marshall's conclusion? “Americans aren't breaking up with stocks.” [Watch our video to learn more.]( --------------------------------------------------------------- Job openings drop — without a spike in unemployment There are growing signs that overheated job markets in the U.S. and other developed economies are cooling, according to Goldman Sachs Research. In the [U.S., the job openings rate has fallen by more than 1.5 percentage points from its peak, while the unemployment rate has crept slightly lower]( Joseph Briggs writes. Other major economies like Canada and the U.K. have had a similar pattern of declining job openings, while unemployment rates stay low. The “Beveridge Curve” is a way to visualize that relationship between unemployment and job openings. The curve is rotating inwards in a number of economies as the rate of job openings declines but so does joblessness. Not all economists expected that to happen — or even thought it was possible. Last summer, our economists argued that the surge in job openings — and large outward shift in the Beveridge curve — was mainly driven by a sharp drop in the share of unemployed workers applying for jobs during the pandemic, as well as by employers overestimating their hiring needs because the pandemic had distorted demand. As a result, the Beveridge curve would shift inward as “search intensity” recovered and economic conditions normalized — which is exactly what happened. --------------------------------------------------------------- A ‘great de-stocking' in oil and commodities could pave the way for gains Oil and commodity prices have fallen this year due to an unprecedented de-stocking, driven by high funding costs and recessionary fears that are incentivizing a liquidation of both physical and financial positions to raise cash, according to Jeff Currie, global head of commodities in Goldman Sachs Research. But this “[great de-stocking]( could also pave the way for strong gains — if the economy avoids a recession — given that the fundamental backdrop still remains very supportive, he explains. “I think it's a lot to do with the macro environment that we're in that is creating these incentives to de-stock,” says Currie on [Goldman Sachs Exchanges](. “The key message here is it cannot go on forever. Eventually, you have nothing left to de-stock.” Oil prices, for one, are expected to go up this year, says Currie, who has a year-end target of $97 a barrel. “This summer, we expect the market to transition into a significant deficit,” he says. “The recent data suggests we're already making that transition into deficit markets. And as the inventories begin to draw and if you don't get a recession, then you reverse all those short positions. The upside here is substantial...The market is as short today as it was during Covid when prices went negative.” --------------------------------------------------------------- Quoted at GS “We need to come together and rise up beyond our own selves and really think about the impact this can have in both the amazing sense and also, if we don't get it right, in the negative sense.” — Greg Brockman, co-founder and president of ChatGPT creator OpenAI, on the need for better cooperation between AI companies and regulators; from the [Goldman Sachs/SV Angel AI Forward event]( in San Francisco on June 22, 2023. --------------------------------------------------------------- Briefings Brainteaser: Where are bond yields highest? Central banks have been ratcheting up interest rates to contain inflation, and now there are signs that some are getting close to a pause. Which of these country's 10-year bonds have the highest yields? A) U.S. B) U.K. C) Greece D) Italy [Check the answer here.]( --------------------------------------------------------------- Goldman Sachs in the news [Financial Times]( May 25 [The stark ‘de-risking' choice facing economies]( [Fortune]( May 24 [Goldman's McDermott on how blockchain tech will produce ‘a profoundly different financial system']( [Barron's]( May 19 [Goldman Sachs CEO disagrees with markets on rates and inflation]( (0:51) [CNBC]( May 19 [AI has been a tailwind for the S&P in general, says Goldman Sachs' Tony Pasquariello]( (3:17) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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