Price action in financial markets is restrained and the dollar is inching higher against its risk-sensitive counterparts as investors monitor debt ceiling negotiations and take positions ahead of tomorrow’s inflation data. Yields are lower and equities are on the defensive after Chinese authorities said export shipments to the rest of the world shrank 6.4 percent in April, providing more evidence of a deepening global economic slowdown.

The first Senior Loan Officer Opinion Survey released in the aftermath of Silicon Valley Bank’s collapse showed lending conditions continuing to tighten – but not at the pace economists had feared. 45 percent of banks raised their credit standards for small businesses “somewhat” in the first quarter, up from 43.8 percent in the fourth quarter of 2022, while the proportion doing the same for medium and large businesses climbed to 46 percent, from 44.8 percent.

Loan demand saw the steepest decline since 2009, with 55.6 percent of loan officers reporting a slump in demand from larger companies, while 53 percent saw the same from small businesses. This would suggest the tightening in financial conditions that began last year is slowly pushing the American economy into recession, but is not indicative of a financial crisis – borrowing volumes tend to surge in the early innings of a true market meltdown as firms try to shore up their balance sheets.

President Joe Biden will meet House Speaker Kevin McCarthy and other Congressional leaders to discuss the debt ceiling later today, but politicians never miss an opportunity to miss an opportunity, so expectations are low.Positions are hardening in both parties, with Republicans committed to rolling back some of Biden’s signature initiatives – like student loan forgiveness and clean energy tax credits – while Democrats want the ceiling raised without preconditions. Much repetition of talking points is to be expected.

We remind our readers that neither of the two parties can claim the mantle of fiscally responsibility – entitlement spending and deficits have expanded at roughly similar paces under both Republican and Democratic administrations in recent decades, and leaders have negotiated concessions around the ceiling dozens of times without making a material dent in the country’s financial trajectory. The political sausage-making process is rarely as transparent – and as full of pork – as during the run-up to debt ceiling deadlines.

Tomorrow’s US consumer price index update could land at a dangerous juncture for financial markets – with currency speculators heavily short the dollar, and fixed income investors firmly convinced rate cuts are coming by September, a hotter-than-expected inflation print could trigger an outsized reaction. Consensus forecasts suggest headline prices rose 5 percent year-over-year in April, maintaining the pace set in March, while core inflation is seen falling to 5.4 percent from 5.6 percent, but could prove more stubborn than anticipated if the price increases discussed on many recent corporate earnings calls are borne out across the economy. Taken in combination with a recent deterioration in European economic surprise indices relative to their US equivalents, we think the euro looks somewhat vulnerable to a break in its strengthening trajectory – or to a more profound reversal.