- Biden and McCarthy agreed on Saturday to raise the federal government’s $31.4 trillion debt ceiling to prevent a default.
- Chinese stocks declined due to a slump in industrial profits.
- The market expects the Fed to lift rates by 25 basis points next month.
European equities experienced slight declines on Monday, while Eurozone bond yields decreased. However, the news of a debt ceiling deal in the US over the weekend maintained positive sentiment for Wall Street futures.
US President Joe Biden and top congressional Republican Kevin McCarthy agreed on Saturday to raise the federal government’s $31.4 trillion debt ceiling to prevent a default. However, market relief from this deal will likely be short-term as concerns persist regarding inflation and potential interest rate hikes.
Asian stocks mostly saw gains, with Tokyo’s Nikkei reaching a new 33-year high. However, Chinese stocks declined due to a slump in industrial profits.
Official data released on Saturday revealed a significant decline in profits for China’s industrial firms during the first four months of 2023. This downturn can be attributed to ongoing challenges companies face, including margin pressures and weak demand, amid a struggling economic recovery.
Wall Street futures, however, rose, with S&P 500 e-minis up 0.2% and Nasdaq e-minis up 0.3%. It’s worth noting that US and UK markets were closed due to public holidays.
The narrowing of US six-month credit default swaps indicated a decrease in the cost of insuring against short-term exposure to a US debt default. However, the five-year swap increased, signaling market caution regarding the debt deal.
The US House Rules Committee announced a meeting on Tuesday afternoon to discuss the debt ceiling bill, emphasizing the need to pass it through a divided Congress before June 5.
According to Samy Chaar, chief economist at Lombard Odier, if Congress approves the debt ceiling deal, market focus will return to the US Federal Reserve’s rate plans.
He mentioned that the narrative would revolve around the Fed’s efforts to curb inflation, which could generate market anxiety due to the impact on valuations. The market expects the Fed to lift rates by 25bps next month and hold them at that point for the rest of this year.
Two-year US yields reached their highest level in over two months following the release of higher-than-expected data on Friday’s personal consumption expenditures price index.