From where I sit, there are at least three big unknowns currently preventing investors from making up their minds about much of anything right now. First, the debt-ceiling debate: Treasury Secretary Janet Yellen has been using “extraordinary measures” to pay the country’s bills since mid-January as her department’s ability to borrow remains in legislative limbo – without a resolution soon, the country could technically default on its debt as soon as June 1st (something that everyone agrees would be bad, but nobody really knows how bad…) Second, is the Fed on “pause” or not? Chairman Powell seemed to strongly suggest they might be when he announced the Fed’s latest quarter-point increase at the beginning of May, but an idea that a few other Fed officials seemed to throw a little cold water since then. And third, there’s still the “are we or aren’t we headed for recession?” question lingering in the background.

These unknowns have shape-shifted over time, but in my view all three (and perhaps a small handful of others) are probably responsible for the massive trading range U.S. equities have been in for the better part of a year: without clarity about much of anything, nobody is willing to stick their neck out and take a stand one way or another (this is reflected in trading volumes, too, which are currently running about 25% where they were this time last year.¹

But for one brief and shining moment last week, it looked like we might have a resolution to all three. On Thursday, Speaker of the House Kevin McCarthy voiced optimism and suggested that a debt deal might make it to the floor of the house by early this week, a view generally echoed by the White House.² Meanwhile, Powell doubled down on his willingness to pause on Friday at an event alongside former Fed Chair Ben Bernanke by saying “we’ve come a long way in policy tightening” and “we can afford to look at the data,” comments that the market guessed were FedSpeak for “we probably really are going to pause in June.” And as for the recession debate, well, those who put faith in things like the Index of Leading Economic Indicators were treated to this little gem: “The Conference Board forecasts a contraction of economic activity starting in Q2, leading to a mild recession by mid-2023.”³ (OK, that last one isn’t exactly great news, but at least it provides some additional clarity.)

Of course, some of these supposedly “done deals” were good for sentiment (Jerome Powell’s seeming commitment to pause, McCarthy and Biden’s would-be debt deal) while others are bad (recession), which is probably why there wasn’t a bigger reaction than what ended up with. But markets were at least generally upbeat, with back-to-back 1%-plus gains in the Nasdaq Composite to end the week. (Gains elsewhere were a little more muted, but still mostly positive for U.S. equities.)

But by midday Friday, at least one of the “done deals” seemed a lot more like “deal, done for,” when lawmakers negotiating the deal abruptly left a meeting to hash out the details and negotiations were officially placed on “pause.” (Incidentally, it was shortly after this that Powell made his remarks regarding his own pause – this one related to his Fed’s rate-hiking campaign – which probably helped rescue the market from a mini little freak-out when debt talks hit the fan and splattered all over the back wall of whatever room in the White House where they were taking place.)

Whew, OK, that’s a lot of back-and-forth (and WAY more drama than the stock market’s cute little 1-2% gain for the week would seem to justify). But the bottom line seems to be that we’re pretty much back to where we were before all this supposed “clarity” hit markets: debt negotiations are back on, but the gulf between the two sides doesn’t seem that much smaller, and there’s almost certain to be more posturing from both sides as the so-called “ex-date” approaches in early June. Meanwhile rates traders, who in sum currently seem to think the Fed will pause, were all over the map last week and still place the chance of another Fed hike in mid-June at about a one-in-four.⁴

As for the recession, yeah, well… that still seems to be pretty much a done deal (at least if you believe most economists). And last week’s published data didn’t do a whole lot to dispel that notion. Despite having spent pretty much all their COVID-era windfall, Americans are still spending – retail sales advanced by 0.4% in April, the first month-over-month gain since a big, splurgy blow-out in January, and all but one of the high-profile retailers who reported quarterly earnings last week beat estimates pretty comfortably.^{5, 6} But the retail sales figure itself was only about half as robust as expected, and post-earnings commentary was almost universally cautious. Common themes expressed by retail executives during those calls included weaker sales as the quarter dragged on, as well as consumers’ increasing aversion to buying big, expensive stuff that they don’t really need – two things that feel a lot closer to a recessionary mindset than not.

On the industrial side, things didn’t look a whole lot better: both regional Fed manufacturing reports that we got last week were firmly in the red, possibly ending a month’s-long disagreement over which direction the sector is really heading.^{7, 8} The closely-watched Empire State manufacturing report, which polls manufacturers in New York State about current and expected business trends, was particularly bad, swinging from a moderately strong expansion last month to a deep contraction this month behind plunging new order activity. As a bonus, new inside this month’s report was a decline in both hiring and hours worked by existing employees – another sign, perhaps, that all this Fed tightening might finally be starting to infect the U.S. labor market, which has so far proven itself all but immune from the Fed’s virus of higher rates.

So in spite of what initially appeared to be progress on several fronts, it looks to me like all this uncertainty hasn’t really cleared up much at all – leaving us in the same sort of netherworld of uncertainty that we’ve been locked in for months. Although it still feels likely to me that there will be some kind of deal before the country careens off the cliff into default, in today’s hyper-partisan environment where neither side seems willing to budge much you can never be quite sure (and at a minimum, we should probably expect more theatrics from both extremes as the ex-date approaches). As for the Fed – if it still matters – I guess we’re back in wait-and-see mode, with Powell’s reassuring words not quite enough to put the “will they pause or won’t they” debate firmly and finally to bed. Suffice to say that an additional quarter-point increase, if it comes, would be far enough from consensus that it would likely generate selling pressure for which markets may not be prepared. Meanwhile, the U.S. economy seems to still be lurching its way toward recession. In the absence of a big catalyst in either direction, we’ll just have to wait until the labor market finally breaks before we have our answer to that one.

What to watch this week

With the consumer increasingly in focus, there will be plenty for economists and market-watchers to chew on this week. Friday’s income and outlay report will provide deeper context when held up alongside last week’s retail sales report, perhaps validating the deceleration in sales and increasing aversion for frivolous purchases that that retail executives opined about when they reported quarterly earnings last week. Tucked inside Friday’s report is also a key reading of inflation – so-called “PCE inflation” – that will probably look reasonably tame but still has the capacity to shock markets (and the Fed’s rate-setting peeps) if it isn’t. Of greater interest, though, will be consumer trends more generally as the U.S. economy sits high on the fence trying to decide which way to fall.

Also on Friday will be the final read of May consumer sentiment from the University of Michigan. The preliminary read 10 days ago was a big disappointment, but the good folks in Ann Arbor who are responsible for compiling the data attributed that weakness mostly to negative news flow about the economy rather than something of a more fundamental nature.⁹ I for one think there’s probably more to it than that, but either way its worth remembering that consumers have proven themselves perfectly capable of talking themselves into (or out of) recession even if facts might argue otherwise. That makes Friday’s consumer sentiment report even more critical to the narrative than usual.

On the industrial side of things, we’ll get a few more regional Fed manufacturing reports (Richmond on Tuesday and Kansas City on Thursday), but Tuesday’s “flash” (or “preliminary”) purchasing managers indices from S&P global will probably be the headliner this week. Much to economists’ surprise, recent PMI reports have shown that both manufacturing and services activity has begun to expand again, (albeit at a very slow pace in the case of manufacturing), and that will likely draw most of the market’s attention. But of particular interest this time will be whether or not the “panic hiring” that seemed to dominate earlier reports like these is still in place. That’s the dynamic that saw businesses continuing to hire even as new order activity was clearly tipping over, perhaps in an effort to avoid being under-staffed again if demand were to suddenly turn. But if last week’s Empire State survey respondents are to be believed, some businesses are now taking a more measured approach to hiring as demand slows. If that eventually becomes a broader trend that begins to impact employment levels more generally, the recession riddle will have been solved.

Finally, we’ll get a second round of housing market data for May, beginning with new home sales on Tuesday and pending home sales on Thursday. Last week’s housing market data was somewhat mixed, but the NAHB’s builder sentiment survey continued to improve and inched above 50 for the first time in nearly a year.¹⁰ Builder optimism logically correlates well to new home sales, meaning that an upside surprise to the new home sales data is not out of the question. Any data point that provides a clear view into housing market trends is relevant for the macro discussion insofar as housing is typically the first major sector of the economy to roll over as the economy heads into recession. That’s certainly been true this time around as home sales volumes dropped off a cliff as mortgage rates started to climb, meaning the direction of home sales could tell us a lot about where the economy itself is headed.