Market Pulse

In focus

After a week of dislocations in the Treasury Bill market, where yields moved in sporadic fashion, an initial agreement was finally reached over the weekend to raise the debt ceiling. This deal now needs to pass both chambers of Congress, which will require gathering votes from both sides of the aisle. This could end with the bill being passed later this week to avoid a default on any payments from the Treasury.

The broader U.S. equity market appeared to pay less attention to the debt ceiling negotiations. Instead, investors focused on several earnings beats which drove large gains in some tech names. The mega-cap tech rally continues to pull the S&P 500 higher despite underlying weakness from cyclical sectors such as financials and energy. Small and mid cap stocks also continue to lag large caps.

The overall bond market was more focused on economic data and the potential Federal Reserve (Fed) response last week. With Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, coming in hotter than anticipated, traders started pricing in a higher-for-longer Fed. Fed funds futures are now pricing for the Fed to stay above 5% for the rest of this year. Both bond and equity markets will turn toward the jobs report this Friday to see whether the U.S. economy continues to add jobs.

A look back

• U.S. stocks led the way as the S&P 500 was up marginally, while international markets were down on the week.
• Treasury yields jumped up across the curve. The 2-/10-year curve flattened as the 2-year part of the curve rose the most while longer yields didn’t rise as much.
• President Biden and Speaker McCarthy came to an agreement in principle over the weekend on a deal to raise the debt ceiling. It will need to be passed by Congress.

A look ahead

• Both chambers of Congress will meet to try to gather the required votes in order to pass the bill that raises the debt ceiling this week.
• With the Fed and markets laser focused on jobs, the Nonfarm Payrolls and unemployment numbers on Friday will be key to future Fed interest rate decision making.
• Economic releases: Consumer Confidence, JOLTS Job Openings, ISM U.S. Manufacturing, Nonfarm Payrolls, and the Unemployment rate.

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