Stocks rallied again today on hopes of a debt ceiling deal. The Dow slipped while the S&P and Nasdaq Composite both gained despite some pre-market hawkishness. Yields climbed, too, but were unable to halt galloping tech shares, which led the market higher.
Prior to the midday rally, Dallas Fed President Lorie Logan walloped futures when she spoke to a group of San Antonio bankers.
“After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress,” she said in a prepared speech.
“The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”
Bulls didn’t like this and a moderate pre-market gain for the S&P instantly flipped to a minor loss. Fed Governor Philip Jefferson gave a speech this morning, too, which softened Logan’s bearish blow.
“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates.”
In other words, Jefferson’s in “wait and see” mode while Logan’s staying hawkish until dovish data emerges.
Both Fed officials are voting FOMC members, which gives their comments far more weight than non-voting members. But traders didn’t care about what neither Jefferson nor Logan had to say after House Speaker Kevin McCarthy provided a debt ceiling update from the Capitol.
“I see the path that we can come to an agreement,” McCarthy told reporters.
“And I think we have a structure now and everybody’s working hard, and I mean, we’re working two or three times a day, then going back getting more numbers.”
McCarthy continued, adding:
“I just believe where we were a week ago and where we are today is a much better place, because we’ve got the right people in the room discussing it in a very professional manner, with all the knowledge, all the background from all the different leaders.”
Stocks surged off the daily lows in response. Should McCarthy’s comments have really sparked such a strong intraday rally, though?
Probably not. McCarthy basically said the same things he did yesterday morning in his interview with CNBC. Investors didn’t learn anything new about the debt ceiling debate today.
But to bulls, that doesn’t matter. The fact that McCarthy didn’t deliver a bearish bombshell is reason enough to celebrate.
And, until an agreement is reached, stocks should continue to hang on his every word. President Biden’s too.
However, as we warned earlier this week, a debt ceiling deal should be a very “sellable” event. The pre-deal hype could pump stocks further, but once it arrives, it’s back to reality for traders. That includes slumping consumer demand, slashed retail guidance, and a Fed with at least one voting member who wants to hike again next month.
Bonds fell after Logan’s hawkish speech and have held on to those losses through noon. The CME Group’s FedWatch Tool puts the odds of a rate increase next month at roughly 33%. That’s up significantly from near zero last week, and at one point this morning, it even hit 40%.
Treasury traders are still very concerned about what’s to come next month, and if rate uncertainty persists, it will eventually leak into stocks. Yes, the S&P is up on debt ceiling optimism, but the real question for markets is what comes next – at this point, another potential rate hike – after the US narrowly avoids a default.
