Over the weekend, President Joe Biden, the leading Republican in Congress, and House Speaker Kevin McCarthy reached an agreement on the terms for raising the federal government’s debt ceiling of $31.4 trillion until January 2025. On Saturday night, Biden and House Speaker Kevin McCarthy reached a preliminary agreement on the debt limit after several weeks of talks. Over the next two years, the agreement entails an increase in the debt-limit for a period of two years and maintaining the non-defense and non-veterans discretionary spending at current levels.[0] Additionally, it would establish fresh limitations on specific forms of governmental assistance.[0] If the debt ceiling remains unchanged, Treasury Secretary Janet L. Yellen has warned that the federal government will run out of funds by June 5.[1]
The United States was brought one step away from a historic default due to the agreement.[2] On Wednesday, Fitch Ratings agency put the U.S.’ AAA rating on negative watch, citing the heightened risk of the government failing to meet its payment obligations due to the ongoing debt ceiling debate.[1] According to Fitch, there is an expectation that a deal will be reached within the given time frame.[3]
The possibility of a pause at the June FOMC meeting is becoming a close call due to higher-than-anticipated inflation, consumer spending, and a surprise increase in durable goods orders, along with the hawkish comments made by several Fed officials.[4] The likelihood of the Federal Reserve increasing interest rates by 25 basis points next month has risen to 60% according to market pricing, which is an increase from the previous estimate of 40% prior to the release of Friday’s data. Fed funds futures prices show markets are pricing in a nearly 65% chance the central bank will raise rates by 25 basis points in June, a reversal from initial expectations for a pause.
Ignoring the warning signs of the Federal Reserve’s hawkish talk can be dangerous, and investors should pay attention.[5] Although there is a good possibility of a pause in June, it is doubtful that the predicted rate cuts for later in the year will occur unless there is a significant decline in the economy.[5] It seems that investors are gradually arriving at that realization. Previously, the FedWatch Tool had indicated a probability of almost 100% for a rate cut by the end of the year, but now it has dropped to 80%.[5] The probability of a reduction before September has dropped to less than 20%.[5]
Understanding the debt ceiling, it is the maximum amount of money that the United States government can legally borrow to meet its financial obligations, including Social Security, Medicare benefits, military salaries, interest on the national debt, and other payments. If the debt ceiling is not raised, the US government cannot issue new debt to pay its bills, which puts the country at risk of defaulting on its loans.[3]
Marvell Technology (MRVL) joined the recent surge in semiconductor stocks leveraging artificial intelligence, resulting in a rally.[6] Following the announcement of strong first quarter results and the projection of a doubling in AI revenue for the fiscal year, MRVL stock surged by 32.4% today.[6] Nvidia’s (NVDA) stock witnessed a surge of over 24% on Thursday, thanks to its optimistic outlook on AI.[6] Chip stocks are moving higher, with the Nasdaq 100 posting a new 13-month high.[7]
Overall, the US economy is showing signs of strength, with strong consumer spending and inflation. However, the debt ceiling debate and the potential for rising interest rates from the Fed are causing uncertainty and volatility in the markets.[3] Investors will need to closely monitor these developments and adjust their portfolios accordingly.
0. “Dow Jones Futures Rise On Debt-Ceiling Deal; Tesla Leads 9 Stocks Near Buy Points | Investor’s Business Daily” Investor’s Business Daily, 29 May. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-debt-ceiling-deal-ai-boom-lifts-market-rally
1. “Possible default threatens foundation of global financial system” The Washington Post, 27 May. 2023, https://www.washingtonpost.com/business/2023/05/27/debt-default-financial-system-wall-street/
2. “Asian shares rise as investors cheer US debt ceiling agreement” CNN, 29 May. 2023, https://www.cnn.com/2023/05/28/investing/us-markets-debt-ceiling-intl-hnk/index.html
3. “Treasury yields climb as investors assess state of the economy and debt ceiling talks continue” CNBC, 25 May. 2023, https://www.cnbc.com/2023/05/25/us-treasurys-investors-assess-economy-amidst-debt-ceiling-talks-.html
4. “S&P 500, Nasdaq Week Ahead: Momentum Surges on Debt Deal Optimism” DailyFX, 27 May. 2023, https://www.dailyfx.com/news/s-p-500-nasdaq-week-ahead-momentum-surges-on-debt-deal-optimism-20230527.html
5. “Digging In: While Lowe’s Struggles and Dick’s Sprints…” The Ticker Tape, 23 May. 2023, https://tickertape.tdameritrade.com/market-news/digging-in-while-lowe-s-struggles-and-dick-s-sprints-everyone-s-waiting-for-washington-to-plow-ahead-19486
6. “Stock Market Today: Stocks Jump on Debt Ceiling Progress” Kiplinger’s Personal Finance, 26 May. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-stocks-jump-on-debt-ceiling-progress
7. “Stocks Climb On Signs Of Progress In Debt-Limit Talks” Barchart, 26 May. 2023, https://www.barchart.com/story/news/17227835/stocks-climb-on-signs-of-progress-in-debt-limit-talks