House Freedom Caucus Stuns Markets

Stocks idled this morning as Wall Street waited to see if the hard-fought debt-ceiling deal would cross the finish line. The S&P managed to eke out a 0.15% gain as the tech-heavy Nasdaq Composite rose 0.65%. The Dow, meanwhile, dipped 0.40%.

Treasury yields also slumped in the face of the debt ceiling drama, with the benchmark 10-year Treasury yield slipping to 3.7%, and the 2-year and 30-year yields nudging down to 4.49% and 3.89% respectively. Investors are keenly observing the progress of the debt limit deal, which, if passed, would stave off a potentially catastrophic default.

The weekend saw President Biden and House Speaker Kevin McCarthy agree on a tentative deal to raise the debt ceiling and federal budget. But this agreement is yet to pass its first hurdle, the House Rules Committee, before facing a vote in the House and Senate.

The clock is ticking, with the “X-date” – the deadline for Congress to raise the debt ceiling and avert the first default in US history – looming on June 5. Yet, the consensus on Wall Street seems to be one of cautious optimism. Deutsche Bank’s Jim Reid said that with moderate voices on both sides of the aisle seemingly in favor, there’s a fair chance the deal will pass despite a vocal minority of opposition. This was reflected in the S&P’s 0.50% gain at the open.

In reality, though, Reid’s probably wrong; plenty of Republicans oppose the deal as it stands, and as a result, the bill will likely die on the House floor. This was confirmed when the House Freedom Caucus assembled for a press conference that rattled markets at around 12:30 pm EST.

“Not one Republican should vote for this deal. It is a bad deal. No one sent us here to borrow an additional 4 trillion dollars to get absolutely nothing in return,” said Rep. Chip Roy (R-TX), before adding that “there will be a reckoning about what just occurred unless we stop this bill.”

Investors are also awaiting the May jobs report, set for release this Friday. Expectations lean towards a slight dip in monthly payroll additions and a small increase in the unemployment rate. This data will be closely scrutinized for indications of the Federal Reserve’s next move.

The CME Group’s FedWatch tool still heavily favors (67.7% odds) a 25 basis point increase at the June FOMC meeting, which wraps on June 14th. The tool also expects around a 30% chance of another 25 basis point hike in July. These odds can and will change until then, but Treasurys are clearly gearing up for higher rates.

And a weak jobs report on Friday shouldn’t change that trajectory unless investors see a truly dismal number. Nobody will care about the jobs report, however, if the debt ceiling remains unresolved. Based on statements from House Freedom Caucus members today, the market is headed in that direction, which is the last thing bulls want with “rates higher for longer” back on the table.


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