The three major indices of the U.S. New York stock market showed mixed movements in the early session on the 1st (local time) as the debt ceiling agreement passed the House of Representatives. Private employment data released before the opening far exceeded Wall Street expectations, confirming concerns about tightening. Investors' attention is focused on the employment report from the Department of Labor to be released the following day.
At around 10:30 a.m. on the day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average was trading at around 32,861, down 46.85 points (0.14%) from the previous close. Meanwhile, the large-cap-focused S&P 500 index rose 3.25 points (0.08%) to 4,183, and the tech-heavy Nasdaq index increased by 14.03 points (0.11%) to 12,949.
Currently, within the S&P 500, stocks related to communications, materials, industrials, and financials are on the rise, while utilities, consumer staples, real estate, and consumer discretionary sectors are declining. AI software company C3.ai is trading more than 18% lower due to disappointing earnings guidance. Salesforce fell more than 4% despite beating expectations, as it maintained its annual outlook. Cloud company Okta also dropped nearly 23% amid concerns over growth slowdown and reduced transactions due to worsening macroeconomic conditions. Department store chain Macy's is down 3% as sales fell short of expectations.
Investors are closely watching the congressional procedures for the U.S. debt ceiling agreement, key economic indicators, and the Federal Reserve's future monetary policy path based on these developments.
The House of Representatives approved the agreement the previous day with a vote of 314 in favor and 117 against. The ball now moves to the Senate. Ahead of the Treasury Department's default deadline on the 5th, Senate Majority Whip John Thune has stated his intention to pass the bill by the night of the 2nd. Given the Democrats' majority in the Senate, the vote on the 2nd is expected to pass smoothly. Subsequently, the bill will take effect upon President Joe Biden's signature. The previously released agreement essentially postpones the debt ceiling until January 1, 2025, while partially cutting government spending.
Michael Landsberg, Chief Investment Officer at Landsberg Bennett Private Wealth Management, said, "The House passing the debt ceiling agreement is an important step," adding, "The market has already priced this in. The risk was largely ignored amid expectations that this issue would be resolved."
The private employment data released on the day suggested that the labor market remains robust despite more than a year of Fed tightening. According to private employment data provider Automatic Data Processing (ADP), private sector employment increased by 278,000 in May compared to the previous month. Although this is a slowdown from the revised April figure of 291,000, it far exceeded the market forecast of 170,000.
The weekly initial jobless claims released the same day rose by 2,000 from the previous week but remained historically high. According to the U.S. Department of Labor, last week's initial jobless claims totaled 232,000, slightly below Wall Street's forecast of 235,000. Continued claims, which count those applying for unemployment benefits for at least two weeks, increased by 6,000 to 1.8 million.
These indicators suggest that despite the Fed's aggressive tightening, the overall labor market remains solid. As opinions diverge on whether to raise rates further or hold steady, the Fed's deliberations ahead of the Federal Open Market Committee (FOMC) meeting on June 13-14 are expected to deepen.
The Job Openings and Labor Turnover Survey (JOLTs) released the previous morning also showed U.S. job openings in April at 10.1 million, surpassing market expectations. Since the Fed has cited inflation and an overheated labor market as reasons for further tightening, if employment reports and other data released the following day also exceed expectations, the outlook for Fed tightening will inevitably strengthen again.
In particular, with ADP private employment figures far exceeding Wall Street expectations, there is analysis that the May employment report to be released the next day could also show strong results. ADP private employment typically serves as a leading indicator for the May employment report trend. However, experts also note that the trends have not always aligned perfectly. Wall Street estimates that the increase in May nonfarm payrolls will slow to 189,000 compared to the previous month.
Currently, even within the Fed, opinions are divided between hawks (favoring continued tightening) concerned about persistent inflation and an overheated labor market, and doves (favoring easing) who argue it is time to pause rate hikes and assess the cumulative effects of policy amid recession concerns.
The market largely expects a rate hold. According to the CME FedWatch tool, federal funds futures currently price in about a 72% chance that the Fed will hold rates steady this month, while the probability of a 0.25 percentage point hike stands at around 27%. This is interpreted as a reaction to recent comments by Philip Jefferson, a Fed Board member, and Patrick Harker, President of the Federal Reserve Bank of Philadelphia, who suggested a possible hold in June.
The key will be the upcoming economic data. The Fed is expected to closely monitor indicators until just before the FOMC meeting and deliberate accordingly. Harker, who expressed a hold stance the previous day, also noted that the employment report released this Friday and the Consumer Price Index (CPI) announced on the first day of the June FOMC will be important, leaving the door open for further tightening depending on the data.
In the New York bond market on the day, Treasury yields fell. The 10-year U.S. Treasury yield stood around 3.60%, and the 2-year Treasury yield, sensitive to monetary policy, was around 4.37%. The dollar index, which measures the dollar's value against six major currencies, traded down more than 0.4% to around 103.8.
European stock markets were on the rise. Germany's DAX index traded up 0.74% from the previous close. The UK's FTSE index rose 0.35%, and France's CAC index increased 0.29%. The upward trend is attributed to Eurozone inflation data exceeding expectations and optimism over the easing of U.S. debt ceiling risks.
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