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The debt ceiling crisis

27th May 2023 – 2nd June 2023 | Another week in the markets

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Source: MarketWatch 

Hello Saturday,

This week, the US averts the debt ceiling crisis, India’s FY2023 GDP data comes out, and Salesforce stock drops despite posting good earnings. 

  • The US’s debt limit gets suspended until January 1, 2025, averting a catastrophic default; the Treasury Department auctions one-day cash management bills for the first time since 2007 to support its low cash balances.
  • The Indian economy grows higher than expected at 6.1% in Q4 of FY2023 due to strong domestic demand and exports; however, the economic outlook remains uncertain, given the high unemployment rate and global instability. 
  • Salesforce’s Q1 earnings beat Wall Street expectations, but its stock drops due to high capital costs and an unchanged annual revenue outlook. 
  • IKEA operator Ingka buys US-based supply chain software company Made4Net in an attempt to expedite its expansion plans in the US and enhance its online sales.
  • Dollar General’s stock plunges 20% after the discount retailer cuts sales and profit outlook as its cash-strapped customers turn to food banks and cheaper alternatives. 

Taking stock | Biden bids breach bye | Six point someone | Summer sale | Home improvement | General misgivings | Invest wisely

Taking stock

Wall Street closed higher on Friday after a strong May jobs report and the resolution of the debt ceiling crisis. For the week, the S&P 500 rose 1.83%, the Dow climbed 2.02%, and the Nasdaq gained 2.04%, posting its sixth consecutive week of gains. 

Biden bids breach bye

On Thursday, the US Senate passed a bill, to be signed into law by President Biden over the weekend, to suspend the country’s debt limit until January 1, 2025. Americans can finally breathe a sigh of relief, as this has averted what would otherwise have been the US’s first debt default.

The debt ceiling package passed includes provisions for rescinding about $28 billion of unused COVID-19 relief funds, restarting student loan repayments that were paused when the pandemic broke out, rescinding $1.4 billion given to the IRS under the Inflation Reduction Act (IRA), and repurposing an additional $20 billion of IRS funding for non-defence programmes. The package makes no changes to the IRA’s climate and clean energy provisions, and funding for veterans’ medical care will also be fully maintained.

On Thursday, the US Treasury Department also announced that $15 billion worth of one-day cash management bills would be auctioned the next day. While Treasury bill auctions are common and occur on a weekly and monthly basis, cash management bill auctions, especially those that mature in a day, are uncommon. In fact, this is the first time since 2007 that the Treasury is auctioning one-day bills — over the past 25 years, one-day cash management bill auctions have only been held six times. This is an important measure since the Treasury’s cash balances are currently around $37 billion, the lowest they have been since 2017. 

Six point someone

The Indian economy grew at 6.1% in the January-to-March quarter of the financial year 2023. This beat estimates — the Reserve Bank of India (RBI) had estimated a growth of 5.1%, while a Reuters poll had estimated 5%. For the entirety of FY2023, the economy grew at 7.2%, higher than the expected 7%. Here are some of the key sectors that have added to India’s growth in FY2023.

India's growth chart

Source: Reuters

India is doing better than the rest of the world due to several reasons. First, the domestic demand in India is strong as income growth and consumer spending is increasing. Second, India’s exports have also been showing continued strength. Third, India had not implemented any large-scale fiscal stimulus programs when the pandemic first broke out. Hence, it has been able to avoid the negative economic impact of the withdrawal of such programs, unlike several other major economies. 

And while the Indian economy is not at risk of a recession in 2023 and has recovered faster than expected, economists warn of rocky terrain ahead. A recession in global markets can impact India’s export business significantly, the unemployment rate remains high, and the upcoming monsoon-related risks and geopolitical uncertainties could impact the economic outlook. 

Summer sale

This Wednesday, Salesforce posted first-quarter earnings that beat Wall Street expectations. Its revenue of $8.25 billion was not only higher than the expected $8.18 billion but also grew 11% year-over-year. Salesforce’s subscriber growth surpassed expectations and its Mulesoft business also saw impressive growth. Despite this, Salesforce stock slumped as much as 7% in extended trading. 

One of the primary reasons for this is that its capital costs were $243 million, 36% higher than analysts’ expectations. This ended up overshadowing its revenue growth. And while it raised its 2024 earnings forecast, it left its revenue outlook unchanged. Despite this, Salesforce has been performing well as a tech giant. Prior to the after-hours stock drop on Wednesday, Salesforce stock was up 67% year-to-date, significantly outperforming the S&P 500, which is up by about 9%. 

Home improvement

IKEA operator Ingka Group has bought US-based supply chain software company Made4Net. This strategic acquisition will help the Swedish furniture retailer speed up its plans to expand in the US and grow its online sales. Ingka is planning to open 17 new stores in the US, and will also upgrade its existing stores.

Made4Net’s state-of-the-art software analyses the warehouses, worker productivity, and delivery routes of companies in order to increase efficiency and cut costs. Since IKEA’s consumers are increasingly demanding next-day and same-day delivery, the company expects that Made4Net will help improve its warehouse and logistics operations, enhancing their consumers’ experience. 

While the deal’s amount remains undisclosed, its terms state that Made4Net will continue to serve its existing customers, such as Uber and DHL, and will operate as an independent subsidiary based in New Jersey. 

General misgivings

American discount retailer Dollar General’s stock had one of its worst days this week. On Thursday, the stock plunged 20% after the company cut its sales and profit forecasts for the year. Dollar General’s core consumers are low- to middle-income groups, earning less than $40,000 annually, who are cutting back on spending on discretionary items like clothing and home goods. They are also relying more on food banks, credit cards, and savings for essential items as they struggle with higher prices. 

The retailer now expects net sales to rise between 3.5% and 5%, compared to its prior outlook of 5.5% to 6%. It also slashed its outlook for a rise in same-store sales from 3-3.5% to 1-2%. Dollar General, once the fastest-growing retailer by store count, is also dialling back on expansion.

Invest wisely 

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Warm regards,
Another week
in the markets

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