U.S. stocks heavy as debt ceiling angst weighs

Main U.S. indexes end down: DJI off ~1%

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Energy weakest S&P 500 sector; comm svcs leads gainers

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Dollar up slightly; crude falls; gold, bitcoin both off >1%

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U.S. 10-Year Treasury yield rises to ~3.54%

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U.S. STOCKS HEAVY AS DEBT CEILING ANGST WEIGHS (1602 EDT/2002 GMT)

U.S. stocks retreated on Tuesday after U.S. retail sales data for April pointed to softer consumer spending, while uncertainty about interest rates and debt limit negotiations weighed on sentiment.

The DJI lost around 1%, while the S&P 500 fell just over 0.6%.

After coming within 2% of its August 26, 2022 Fed Chair Powell hawkish Jackson Hole speech intraday high, the Nasdaq reversed, and ended down slightly.

Of note, U.S. Treasury Secretary Janet Yellen on Tuesday warned that a default on government debt would likely leave millions of Americans without income payments, potentially triggering a recession that could destroy many American jobs and businesses.

Meanwhile, lawmakers were scheduled to meet to work on a deal to raise the U.S. government's $31.4 trillion debt ceiling, with Democratic President Joe Biden.

A majority of S&P 500 sectors ended lower on the day with energy and real estate taking the biggest hits.

Communication services and tech were the only gainers.

Banks , midcaps, small caps, and transports were among underperformers. However, FANGs showed strength.

With this, growth had its best day relative to value in two months. .

Meanwhile, the U.S. 10-year Treasury yield, now around 3.54%, is on track to rise for a third-straight day, and is once again flirting with its 200-day moving average (DMA), which resides around 3.57%, and its 100-DMA, which sits around 3.60%.

Since closing below the 100-DMA on March 10, the yield has yet to end a day back above it.

Here is where markets stood just shortly after the 4 PM close:

(Terence Gabriel)

DEBT CEILING RISKS COULD BOOST GREENBACK, BEFORE A FALL (1330 EDT/1730 GMT)

Tighter credit conditions caused by the U.S. regional banking crisis have increased the likelihood that the U.S. economy will fall into recession, leading to Federal Reserve rate cuts and a weaker dollar.

Before then, however, the greenback could be boosted by any breakdown in money markets as Congress delays raising the U.S. debt ceiling, according to ING.

“We argue that Fed cuts later this year should prompt a multi-quarter – probably multi-year – cyclical dollar decline,” ING analysts said in a report on Tuesday. “Before then, however, we suspect financial market tension will rise.”

If the threat of a U.S. default seizes up money markets, foreign exchange markets could also be vulnerable to flash crashes, as were seen in 2008/2009 and in March 2020. The euro could drop below $1.05 against the greenback “if wholesale USD funding markets became impaired.”

ING expects that any such move would be temporary, however, and would reverse quickly when the Fed and politicians restore order. The firm expects the euro to rise to $1.20 against the greenback by year-end, while the yen will also strengthen to 120.

The single currency was at $1.08640 on Tuesday, while the yen was at 136.48.

(Karen Brettell)

GOLDMAN SACHS RECOMMENDS INVESTORS 'GO LONG' ON EM BANKS (1300 EDT/1700 GMT)

Goldman Sachs recommend going long on bank stocks in emerging markets such as the ones in Latin America and the Middle East, stating these offer attractive bank equities from a macro perspective.

In a note led by Caesar Maasry, head of EM cross asset research, GS says that the direct impact of banking spillovers from the U.S. into emerging economies is limited, as U.S. regional banks do not conduct lending on a global scale.

In order to gauge which global banks screen as an attractive investment currently, GS considers three aspects:

1) recent performance

2) valuation in the context of return on investment (ROE)

3) macro credit growth trends

Upon comparing on the basis of ROE, they found that most developed market banks, particularly in Japan and Europe, screen as quite expensive, whereas banks in Greece, Colombia, and Qatar appear undervalued.

On credit growth, they note that credit has generally risen across EMs over the past two decades, whereas credit has consistently declined in DMs.

On combining these three bank metrics, they find the bank equities in MSCI Qatar, Saudi Arabia, Chile, Colombia, Thailand, and Greece screen as the most attractive within EM and recommend investors go long these stocks against the broader MSCI EM Consumer Staples sector, traditionally considered as a defensive play.

Recent market action suggests investors are treating banking concerns as a localized issue as opposed to a significant economic risk driven by credit concerns.

Lastly, they note that the U.S. Fed may have put in its final hike of this cycle, and recent surveys suggest lending standards and credit availability are not deteriorating worse than their base case estimates.

They do, however, flag risks that a broader U.S. growth slowdown may have just seep through some weakness.

(Shashwat Chauhan)

FTSE RUSSELL TO ANNOUNCE PRELIMINARY LISTS - WHAT TO WATCH OUT FOR (1239 EDT/1639 GMT)

This coming Friday, May 19, FTSE Russell

will announce

its preliminary lists of changes to its family on indexes after the close of trading, the latest in its multi-step process of refreshing its indexes before being finalized on June 23.

Roughly $20.1 trillion is currently benchmarked to its indexes, including approximately $12.1 trillion benchmarked to the Russell U.S. Equity Indexes, according to FTSE Russell.

Goldman Sachs chief U.S. equity strategist David Kostin anticipates 23 additions to the large cap Russell 1000, 237 additions to the small cap Russell 2000 and 163 deletions from the Russell 3000.

Inclusion in each index was determined by market capitalization this year on what is known as "rank day" and took place on April 28. In a tweak from recent years, Russell moved up the rank day from the from the first week in May and moved up the preliminary list day from the first week in June.

As a result of this extended runway between the rank day and the finalization of the new Russell indexes, Steven DeSanctis, equity strategist at Jefferies, believes this could creates gaps in market caps.

DeSanctis sees the top end of the Russell 2000 market cap at $6 billion, with the smallest at $141 million, while the top end of the Russell MidCap is expected by DeSanctis at just under $47 billion and the low end at $2.3 billion.

In the Russell 1000 growth, both Kostin and DeSanctis expect Meta Platforms to take on a bigger waiting. Kostin sees the Facebook parent's weight climbing to 3% from 0.6% as it moves to 100% growth from 84% value and 16% growth. DeSanctis also sees Meta moving to 100% growth, which in turn will increase the weighting of communication services by 3.3% while losing 3.4% in the Russell 1000 value index.

(Chuck Mikolajczak)

IS DROP IN U.S. CONSUMER CONFIDENCE A BUY SIGNAL? (1209 EDT/1609 GMT)

U.S. consumer confidence has been poor for the last year and the preliminary reading for May showed sentiment at a six-month low. That could be good news for investors with an intermediate horizon, based on historical moves, according to DataTrek.

Data on Friday showed the University of Michigan's preliminary reading on the overall index of consumer sentiment came in at 57.7 this month, the lowest reading since last November and down from 63.5 in April.

The index is based on the responses of 500 individuals to 5 questions, three of which are forward looking, which explains the bearishness of the responses even as the economy remains relatively strong, Nicholas Colas, Co-founder at DataTrek noted in a report.

But drops below 59 are rare and have in the past “been an excellent entry point for investors with a 2 – 5-year horizon,” Colas said, adding that “sentiment, when it is this distressed, is always a contrary indicator.”

DataTrek notes that there have only been 4 times since 1979 when the index has fallen below 59, which is two standard deviations below the index’s long-term mean of 85.

The first was just after the 1979 oil shock and during the Volcker Fed’s fight with inflation in March 1980. The second and third were around the 2008 – 2009 financial crisis and Greek debt crisis of August 2011. The last one was in June 2022, “when US annual inflation peaked and stock/bond markets were making new post-pandemic lows.”

“Each one was a buy signal for equity investors with a multi-year investment horizon,” Colas said.

The University of Michigan will release its final survey for this month on May 26.

RUNNING HOT & COLD: RETAIL SALES, INDUSTRIAL OUTPUT, ET AL (1150 EDT/1550 GMT)

Data on Tuesday offered a buffet of cold and hot dishes, which, taken together, suggests a dampening - though resilient - economy, none of which budged the needle regarding the expected rate hike pause from Powell & Co at next month's policy meeting.

Retail sales staged an unimpressive comeback in April, rising 0.4% - half as strong as the 0.8% consensus expectation - from March's downwardly revised 0.7% decline, according to the Commerce Department.

Scratching beneath the headline, standouts include a 0.8% decline in gasoline station receipts, and a 1.1% drop in department store spending. On the bright side, non-store retailers - the bulk of which is e-commerce - jumped 1.2% and spending on food/beverage services rose 0.6%.

"The April retail sales report shows consumers remain inclined to spend though they are becoming more selective in their purchases," writes Oren Klachkin, lead U.S. economist at Oxford Economics (OE). "While the main engine of GDP growth continues to hum, we see storm clouds gathering on the horizon. We expect a weaker labor market, depleted excess savings buffers, tighter credit standards, and high prices will make consumers less inclined to spend in H2."

So-called "core" retail sales - which excludes gasoline, autos, building materials and food services, and closely corresponds with the consumer spending element of GDP - surprised to the upside, gaining 0.7% on a monthly basis, more than double expectations.

Year-over-year, however, core retail sales gained 1.6%, a sharp deceleration from the March reading.

"The consumer is trying to keep a stiff upper lip, but their lips are beginning to tremble in fear," says Brian Jacobsen, chief economist at Annex Wealth Management.

Next, a report Federal Reserve showed industrial output , particularly from goods makers, handily beating analyst projections.

Much of the gain was attributable to a surge in automobile production.

What's more, capacity utilization - a gauge of economic slack - stuck the expectations landing by gaining 30 basis points to 79.7%.

"Industrial production (was) up with motor vehicle assembly rate highest since July 2020, but other manufacturing (was) cooler," writes Bill Adams, chief economist at Comerica Bank. "Capacity utilization is normalizing ... which will help cool inflation."

Pivoting to the housing market, the mood of American homebuilders hauled itself out of pessimistic territory this month.

The National Association of Homebuilders' (NAHB) National Housing index surprised economists by jumping five points to a print of 50 - the fence dividing pessimism and optimism.

The index, which had been wallowing in pessimistic territory since last July, was given a boost by low inventories of existing homes.

"Lack of existing inventory continues to drive buyers to new construction," says Robert Dietz, NAHB's chief economist. "In March, 33% of homes listed for sale were new homes in various stages of construction."

"With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ search in the quarters ahead," Dietz adds.

Finally, inventories in the store rooms of U.S. businesses surprised analysts by dipping 0.1% in March, on the heels of a downwardly revised February number.

"The fall in inventories in March signals that businesses are cutting back on their stockpiles as the economy slows and consumer demand wanes," writes Matthew Martin, U.S. economist at OE. "We continue to expect a downturn in stocks through the rest of the year as companies rebalance, after shortages supported a wave of inventory rebuilding."

This is not the cheeriest news, considering private inventories was the biggest drag on first quarter GDP:

(Stephen Culp)

U.S. STOCKS MEANDER AHEAD OF DEBT CEILING TALKS (0940 EDT/1340 GMT)

U.S. stocks are modestly lower early on Tuesday after a dour forecast from Home Depot and April retail sales data pointed to consumers feeling the pinch from high inflation and restrictive monetary policy, ahead of crucial debt limit talks.

Indeed, the White House and Republicans are set to sit down later in the day to try to make progress on a deal to raise the U.S. government's $31.4 trillion debt ceiling and avert an economically catastrophic default.

Nearly all S&P 500 sectors are lower, though changes are relatively modest.

Under the surface, bank stocks are among groups in positive territory, as are chips.

Transports are on the weak side.

Growth is outperforming value.

Here is a snapshot of where market stood just shortly after the open:

(Terence Gabriel)

FISCAL SUPPORT SEEN KEEPING INDUSTRIALS AND DEFENSE STOCKS BID (0919 EDT/1319 GMT)

Citigroup says structural fiscal support could be an ongoing tailwind for industrial and defense companies, despite the potential for some near-term policy-related turbulence.

A debt ceiling deal in the near-term and an increased focus on "industrial policy" longer-term, could ultimately garner some bipartisan support said analysts at Citi, led by Andrew Kaplowitz, in a note.

They pick Quanta Services, MasTech Inc, KBR Inc as winners among engineering and construction companies.

Lockheed Martin, General Dynamics and Northrop Grumman should be well-positioned to benefit from defense remaining a priority even in an era of potentially slower overall budget growth, Citi says.

(Reshma Rockie George)

NASDAQ COMPOSITE: STILL CHUGGING ALONG (0901 EDT/1301 GMT)

The Nasdaq Composite ended Monday at its highest level since late-August of last year. Additionally, the tech-laden index is on track for a fourth-straight weekly gain.

With this, one measure of the Nasdaq's internal strength continues to confirm what is now a more than 20% advance off its October intraday low:

The IXIC ended Monday at 12,365.209 which is its highest close since August 25, 2022, when it finished at 12,629.265.

The August 25 close was one day prior to Fed chair Powell's hawkish Jackson Hole speech. On August 26, the IXIC hit an early intraday high of 12,655.836 before then resuming a slide that would ultimately lead to new lows.

The Nasdaq New High/New Low (NH/NL) index, on a monthly basis, bottomed in October at 14.5%. The Nasdaq formed what stands as its bear-market intraday low that month.

The NH/NL index has now risen to 31.4% and is on track to rise for a seventh-straight month. With this, the measure's seven-month rate-of-change (ROC) is currently its third strongest reading coming out of a trough since the mid-1990s. Only the upturns out of its 2003 and 2009 troughs were stronger.

This measure certainly has a lot of room to rise before reaching previous peaks. And even then, in a number of instances, including its most recent top in 2021, the Nasdaq moved still higher, while the NH/NL index, on a monthly basis, diverged.

With about half of May trading to go, bulls will want to see this measure continue to rise. However, a down-tick in the ROC may signal that the period of easier gains has passed.

A down-tick in the measure itself, followed by a break below its 10-MMA, which has now risen to 22.3%, could coincide with a return of much more intense IXIC pressure.

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)