The markets have battled an economic and financial Hydra so far this year and, for the most part, have been winning. Inflation remains stubbornly high, but the bond market is on pace to deliver a return of more than 4.5% in 2023¹. The Federal Reserve continues to ratchet interest rates higher, but the tech-heavy NASDAQ has returned a whopping 20% for the year through May 19². And though banking troubles fester, dominant players JP Morgan, Citigroup and Wells Fargo have been in positive territory since January 1². The debt ceiling, which could arguably do the most damage to the markets, had largely been ignored – until last week.

The stock market closed slightly higher on Monday, encouraged by upbeat comments from Treasury Secretary Janet Yellen that debt ceiling negotiations were going well and that she was confident a default would be avoided³. A good day for financials helped the Dow Jones Index break a five-day losing streak. Stocks reversed course Tuesday, however, as House Speaker Kevin McCarthy noted continued obstacles to a debt ceiling deal². Disappointing full-year guidance from Home Depot also weighed on the stock market, with the Dow ending the day down more than 300 points².

McCarthy then struck a more positive tone, mentioning the possibility of a deal by week’s end, and Tuesday’s losses were quickly erased by market close on Wednesday². Target delivered a good Q1 earnings report, which also pushed stocks higher². Continued optimism on Thursday drove stocks to their highest close since August². Bonds, on the other hand, slumped as Dallas Fed President Lorie Logan hinted that the Fed may continue raising rates at the next meeting in June². The bond market had been pricing in a more than 95% chance the Fed’s string of rate hikes was over, but those odds dipped below 80% and bond prices moved lower for the week⁴.

The debt ceiling roller coaster continued on Friday. Stocks rallied to start the day as debt talks continued but slid lower when GOP negotiators walked out on Friday afternoon². With time for a deal running short, we wouldn’t be surprised to see an extension that pushes the debt ceiling deadline to later in the summer. The financial markets may not like the uncertainty that comes with a delay, but delay is certainly preferrable to default. With no agreement and no extension, expect a choppy week ahead.

https://www.wsj.com/market-data/bonds/benchmarks

https://www.morningstar.com/

https://www.cnbc.com/2023/05/14/stock-market-today-live-updates.html

https://www.cnbc.com/2023/05/15/stock-market-today-live-updates.html

https://www.cnbc.com/2023/05/16/stock-market-today-live-updates.html

https://www.cnbc.com/2023/05/17/stock-market-today-live-updates.html

https://www.cnbc.com/2023/05/18/stock-market-today-live-updates.html

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html