Nasdaq 100 hits year highs, in the face of debt ceiling and rate rise risks

Wall Street continues to reflect confusion amid contentment, with the tech sector leading, even as debt ceiling talks in Washington remain uncertain. The Nasdaq 100 hit a 12-month high. On the other hand, traders are finally starting to believe that the Federal Reserve may not be finished with rate hikes – and with good reason after comments from Fed governor James Bullard. This week is light on economic data.

TODAY’S MAJOR NEWS

Debt ceiling talks enter the danger zone

President Joe Biden and House Speaker Kevin McCarthy meet again today to continue negotiations over raising the debt ceiling with 10 days to go  before the Treasury Department says it will start to run out of money to meet its obligations. Both sides indicate that a default on our nation’s debt is not an option, but these talks generally go down to the last minute because that’s when each side has the greatest leverage. However, that may not be the greatest risk as we enter the danger zone. Just getting close to the June 1 deadline can result in a downgrade of the US credit rating, raising interest rates on public and private debt – increasing US interest payment obligations, and contributing to consumer inflation pressures that slows the economy.

Rate rises back on the agenda?

Wall Street is finally starting to believe that the Federal Reserve may not be finished with rate hikes thanks to economic resiliency in the face of rapidly escalating interest rates. On cue, St. Louis Fed president James Bullard said earlier today that he thinks the Fed needs two more rate hike this year – "sooner rather than later", without giving dates – due to pervasive inflation and robust economic growth. "I think we're going to have to grind higher with the policy rate in order to put enough downward pressure on inflation," he said. "I'm thinking two more moves this year, not exactly sure where those would be. But I've often advocated sooner rather than later."

Bottom line – risk-on?

The financial outlook might be facing mounting interest rate risks but equities are shrugging this off. Bonds and commodities are tending bearish.

TODAY’S MAJOR MARKETS

Equity markets

• The S&P 500 and Nasdaq 100 rose 0.4% and 0.8%, respectively
• The KBW Regional Bank Index rose 3.3%, extending last week’s rally
• The FTSE 100 and DAX were up 0.2% and down 0.4%, respectively
• The VIX, Wall Street’s fear index, was unchanged at 16.9

Currencies and Bonds

• The dollar index, Euro/Dollar and Dollar/Sterling were all unchanged
• Yields on 2- and 10-year Treasuries rose modestly to 4.35% and 3.71%

Commodities

• Gold prices fell back 0.3% to $1,975 per ounce
• Crude oil prices rose 0.4% to $71.8 per barrel
• Corn, soybeans and wheat tried to rally following last week's sharp losses
• Corn and soybeans posted impressive gains

TODAY’S DISCUSSION

Farmers and commodity traders hope for a 2023 drought to buoy prices

Forecasts of a major drought across the Midwest are coming from farmers and commodity analysts rather than professional weather forecasters. Twitter is alive with forecasts of a repeat of the 2012 drought. Such talk is an easy sell when commodity prices are collapsing and farmers across the Midwest are undersold of both old-crop and new-crop inventories. They’re looking for a reason for hope that the recent bloodbath in commodity price collapse is temporary, anticipating that a seasonal weather scare will provide another opportunity to sell at profitable levels. Nobody wants a crop failure, but most producers want the market to at least worry about a crop failure to the point that the market rallies to give them a chance to sell.

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com