© Reuters. FILE PHOTO: A cyclist passes by the U.S. Capitol building, on the morning of the first day of the 118th Congress in Washington, DC, U.S., January 3, 2023. REUTERS/Jon Cherry
By David Randall
NEW YORK (Reuters) – A last-minute deal to raise the U.S. $31.4 trillion debt ceiling will likely shift Wall Street’s attention to other emerging risks, including further Federal Reserve interest rate hikes and an expected reduction in fiscal spending.
At its May 3 meeting, the Federal Reserve signaled it was open to pausing its most aggressive rate hiking cycle since the early 1980s at its meeting that ends June 13, leading investors to pile back into equities and other riskier assets.
The is up more than 9.4% for the year to date and now trades at nearly 19 times its forward earnings, at the high end of its historical range. Megacap technology and growth stocks, which benefit from lower interest rates, have led the market’s advance.
“There has been a pivot party in equities, which is this idea that Fed will pause and reverse course that has rewarded risk assets,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.
“We think that there’s limited upside from here.”
Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.
Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.
Markets are now pricing in a roughly 50-50 chance that the Fed raises rates by another 25 basis points at its June 14 meeting, up from an 8.3% chance seen of an expected rate hike one month ago, according to CME’s FedWatch Tool.
A Congressional package raising the debt ceiling, meanwhile, is expected to cap spending on government programs.
That, combined with the possibility of higher interest rates to cool inflation, could help push the U.S. economy into a recession despite ongoing strength in the labor market, said Tony Rodriguez, head of fixed income strategy at asset manager Nuveen.
“We expect to see a slowing economy because a number of what had been tailwinds are becoming headwinds.”
The U.S. economy has remained unexpectedly resilient, given widespread expectations at the end of 2022 that it would be in recession by mid-year. Investors will be closely watching next Friday’s jobs report to…
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