Search Mark
Home / Expert Opinion

Fed Rate Hike Expectations Ease Amid Debt Ceiling Tensions, Fueling Market Reactions 

U.S. stocks closed lower Friday, 19th May 2023 as debt ceiling talks broke down, with no immediate plans to resume. However, the declines were relatively small as investors remain optimistic that a deal will be reached before the deadline. 

In light of Federal Reserve Chairman Jerome Powell’s indication of a pause, traders have reduced their bets on a June rate hike to 25%. Combined with the uncertainty surrounding the debt ceiling, this adjustment seems more appropriate. 

Regional bank shares were under pressure after Treasury Secretary Janet Yellen suggested said that more mergers might be needed. 

Foot Locker shares experienced a 27% decline after the company reported that lower tax refunds and increased prices for gas, food, and rent were affecting its customers’ spending on discretionary goods. 

For the week, the three major indexes recorded gains, with the Nasdaq Composite leading the way with a 3% increase, its best weekly performance since March. The S&P 500 saw a 1.6% jump, and the Dow Jones Average added 0.4%.  

Here are the closing levels on Friday, 19th May 2023:

 Last Change %Chnage 
Dow Jones 33,426.63. -109.28. -0.33% 
S&P 500 4,191.98 -6.07. -0.14% 
Nasdaq Comp12,657.90 -30.94. -0.24% 
US 10Y 3.67%   
VIX 16.81 +0.76 +4.74% 

Debt ceiling. That was the driver of the markets last week. 

It is worth noting that most of the gains came from a few mega-cap names, which have been major drivers of the market this year. 

Friday’s market close was attributed to the debt ceiling impasse, but considering the modest drop in prices, it appears that investors are confident that a deal will be reached soon. 

According to the CME Fed Watch tool, there is now a 44.7% probability that the Funds rate will be between 4.50% and 4.75%. This is a change from the previous week’s prediction of 4.25% to 4.50%, indicating a revised expectation of 2 Fed cuts by the end of the year instead of 3. 

I mentioned earlier that as long as the market’s perception of rate cuts remains unchanged, investors will likely maintain a bullish outlook. The market’s significant jump was primarily attributed to the debt ceiling situation, and the revised expectations for Fed cuts may not have been fully factored in yet. 

The debt ceiling issue is expected to introduce volatility into the markets until it is resolved. Once it is resolved, market attention will likely shift back to the economy, which may or may not be as bullish, particularly if fewer Fed cuts are anticipated this year. 

Another concern is that some profit-taking might be occurring, given the substantial rallies of a few mega-cap names. 

Source: CBOE, Bloomberg, CME Group 

This commentary is written by James Gomes.
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

Risk Disclosure
Trading in financial instruments involves high risks due to the fluctuation in the value and prices of the underlying financial instruments. Due to the adverse and unpredictable market movements, large losses exceeding the investor’s initial investment could incur within a short period of time. The past performance of a financial instrument is not an indication of its future performance. Investments in certain services should be made on margin or leverage, where relatively small movements in trading prices may have a disproportionately large impact on the client’s investment and the client should therefore be prepared to suffer significant losses when using such trading facilities.

Please make sure you read and fully understand the trading risks of the respective financial instrument before engaging in any transaction with Doo Prime’s trading platforms. You should seek independent professional advice if you do not understand any of the risks disclosed by us herein or any risk associated with the trade and investment of financial instruments. Please refer to Doo Prime’s Client Agreement and Risk Disclosure Statement to find out more.

This information is addressed to the general public solely for information purposes and should not be taken as investment advice, recommendation, offer, or solicitation to buy or sell any financial instrument. The information displayed herein has been prepared without any reference or consideration to any particular recipient’s investment objectives or financial situation. Any references to the past performance of a financial instrument, index, or a packaged investment product shall not be taken as a reliable indicator of its future performance. Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners, and their respective employees, as well as managers, make no representation or warranties to the information displayed and Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners and their respective employees, as well as managers, shall not be liable for any direct, indirect, special or consequential loss or damages incurred a result of any inaccuracies or incompleteness of the information provided. Doo Prime and its holding company, affiliates, subsidiaries, associated companies, partners, and their respective employees, as well as managers, shall not be liable for any direct, indirect, special, or consequential loss or damages incurred as a result of any direct or indirect trading risks, profit, or loss arising from any individual’s or client’s investment.

Share to

Expert Opinion

Market Retreat On Rising Geopolitical Tensions And Bank Earnings

The stock market closed lower, marking its worst week since October 2023 due to poor earnings from banks like JPMorgan Chase and rising Middle East tensions.

2024-4-15 | Expert Opinion

Stock Market Finish Positive Amid Economic Optimism 

The stock market ended the week positively after a strong jobs report, indicating sustained strength in the U.S. economy despite potential rate hikes

2024-4-8 | Expert Opinion

Wall Street's Optimism Amidst Fed’s Stance And Inflation Data 

Wall Street signals cautious optimism, despite ongoing economic shifts. Calls for interest rate cuts persist, yet the Fed's maintain a steady stance,

2024-4-2 | Expert Opinion