[New York Stock Market] Relief Rally on Debt Agreement Passage... Nasdaq Up 1.28%

The three major indices of the U.S. New York stock market all closed higher on the 1st (local time) as the debt ceiling agreement passed the House and was sent to the Senate, where the Democrats hold the majority. However, the private employment data released that day exceeded market expectations, leaving uncertainty over the future monetary policy path of the Federal Reserve (Fed). Investors' attention is now focused on the employment report from the Department of Labor to be released the following day.

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,061.57, up 153.30 points (0.47%) from the previous session. The S&P 500, centered on large-cap stocks, rose 41.19 points (0.99%) to 4,221.02, and the tech-heavy Nasdaq rose 165.70 points (1.28%) to close at 13,100.98. The closing prices of the S&P 500 and Nasdaq were the highest since August 2022.

In the S&P 500, nine sectors excluding utilities and consumer staples all closed higher. Energy stocks rallied over 1% supported by rising oil prices. Related stocks in technology, telecommunications, materials, industrials, and financials also rose more than 1%. Dollar General slid nearly 20% after lowering its annual guidance due to weak first-quarter results. Pet-related company Chewy jumped over 21% on strong earnings. Salesforce fell more than 4% despite beating expectations but maintaining its annual outlook. Nvidia, considered the biggest beneficiary of artificial intelligence (AI), rebounded from the previous day's decline, rising more than 5%.

[Image source=Reuters Yonhap News]

Investors are closely watching the congressional process of the U.S. debt ceiling agreement, key economic indicators, and the Fed's future monetary policy path based on these. Jamie Cook, managing partner at Harris Financial, said, "Much of the market's attention is shifting from whether the government will default?a scenario that seems unlikely?to how much the benchmark interest rate will rise going forward."

The House passed the agreement the previous day with 314 votes in favor and 117 against in the plenary session. The ball is now in the Senate's court. The Senate vote is expected on the 2nd, with Senate leaders including Democratic Majority Leader Chuck Schumer urging swift action before the default deadline. Since the Democrats hold the majority in the Senate, passage is virtually assured, but some senators are pushing for amendments, which could become a variable.

In a floor speech that day, Leader Schumer said, "If you want to avoid default, time is a luxury the Senate does not have," urging quick legislative progress without amendments. He added, "We cannot accept any changes that would send this bill back to the House," warning that such changes would lead to a default. If amendments pass in the Senate, the bill must return to the House for approval, making it practically impossible to pass before the default deadline on the 5th.

The previously released agreement essentially postpones the debt ceiling until January 1, 2025, while partially cutting government spending. Republican Senator Mike Lee, who plans to propose amendments, appeared on a radio program that day and predicted about 20 votes against the agreement in the Senate. Ross Mayfield, investment strategy analyst at Baird, told CNBC, "Removing potential negative catalysts helps reduce market uncertainty."

The Fed's monetary policy calculations, considered another market catalyst, remain complex. Patrick Harker, president of the Philadelphia Federal Reserve Bank, hinted again that a rate hold in June is possible. As a voting member of this year's Federal Open Market Committee (FOMC), he said in his opening remarks that the Fed is close to a point where it can pause rate hikes. The Wall Street Journal (WSJ) also reported that Fed officials might hold rates steady in June but could resume hikes later.

The market largely expects a hold. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures currently price in about a 76% chance of a rate hold this month, with about a 23% chance of a 0.25 percentage point hike. The S&P Global Manufacturing Purchasing Managers' Index (PMI) at 48.4, below the baseline of 50, indicating contraction in manufacturing, also supports the hold outlook.

On the other hand, the private employment data released that day suggested the labor market remains robust despite more than a year of Fed tightening, raising concerns about further 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 was 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 to 232,000, slightly below Wall Street's forecast of 235,000. Continuing claims, representing those filing 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 there will be further rate hikes or a hold, the Fed's deliberations ahead of the FOMC regular meeting on June 13-14 are expected to deepen. The Job Openings and Labor Turnover Survey (JOLTs) released the previous morning showed 10.1 million job openings in April, exceeding market expectations. Since the Fed has cited inflation and labor market overheating as reasons for additional tightening, if employment data such as the upcoming report also exceed expectations, the Fed's tightening outlook will inevitably strengthen again.

In particular, since the ADP private employment figure far exceeded Wall Street expectations, there is analysis that the May employment report to be released the next day could also show strong numbers. Wall Street estimates the increase in nonfarm payrolls for May to be between 189,000 and 190,000, a slowdown from the previous month. The consensus unemployment rate is 3.5%. Joe Davis, chief economist at Vanguard, said, "Tomorrow's employment report will highlight the challenges the Fed faces in its efforts to bring inflation back to target," supporting further rate hikes.

In the New York bond market that 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 4.34%. The dollar index, which measures the dollar's value against six major currencies, traded down more than 0.7% to around 103.5.

International oil prices surpassed $70 per barrel amid bargain buying ahead of the OPEC+ oil-producing countries' meeting. On the New York Mercantile Exchange, July delivery West Texas Intermediate (WTI) crude oil closed at $70.10 per barrel, up $2.01 (2.95%) from the previous session.