S&P 500 retreats as traders fear more Fed rate hikes, debt-ceiling deal goes to Congress

What’s driving markets

Investors are weighing the market implications of the debt ceiling deal reached over the weekend by Congress, as well as the likelihood of the Federal Reserve raising its policy interest rate again in June.

After President Joe Biden and House Speaker Kevin McCarthy reached a deal to lift U.S.’s debt ceiling over the Memorial Day Weekend, investors are now looking at whether they can sell it to their parties, quickly. By June 5, the federal government exhausts its capacity to pay all its bills, Treasury Secretary Janet Yellen said last week.

Now the bill emerging from the deal, the Fiscal Responsibility Act, goes to the House of Representatives’ Rules Committee on Tuesday afternoon. The House is expected to vote on the deal Wednesday.

A default could wreak chaos on the market, so Ed Mills, Washington policy analyst at Raymond James, says the bill in all likelihood will be passed. “Because the alternative is so bad, we continue to believe members who are undecided will be there and vote for this to get it across the finish line,” he said.

But averting default is hardly the end of the story, he added. “Equally important is the contents of the deal and the market implications” and that’s where the headwinds may emerge for investors, he said.

There’s a glut of Treasury bills that will flood the market in the wake of a enacted debt ceiling deal, Mills noted. The issuance could be around $1 trillion through August, according to BofA Global strategists. “Who buys that?” Mills said — and what are the equity market implications if the money destined for stocks is going to Treasury debt instead, he added.

The debt ceiling implications are not the only concerns for traders, noted Padhraic Garvey, regional head of research in Americas at ING. Investors are also worried about inflation, as the PCE index data released last week looked “uncomfortably high” and that might prompt the Federal Reserve to raise its key interest rate again, Garvey said in a phone interview.

Traders are now anticipating another Fed rate hike in June. Fed funds rate traders are pricing in a 65% chance of another 25 basis point increase, according to the CME FedWatch tool. That’s up from a 28% chance one week earlier, with the backdrop of Fed speak hints at a pause.

Thomas Barkin, chief of The Richmond Federal Reserve, said Tuesday that high inflation probably won’t dissipate quickly barring a sharper slowdown in the U.S. economy.

“[Inflation] is going to be more stubborn than many people would hope,” Barkin said in an virtual interview sponsored by the National Association of Business Economists.

Investors will also be expecting Friday’s employment report for May, “which takes on immense importance as that will be the last major data point that Fed officials will have a chance to comment on before their June 14th rate decision,” said Stephen Innes, managing partner at SPI Asset Management.

In economic data on Tuesday, home prices increased in March with fewer listings on the market, according to the S&P Case-Shiller home price index.

Meanwhile, consumer confidence fell to a six-month low in May, the Conference Board said. The index fell to 102.3, though economists polled by the Wall Street Journal were expecting a read of 99.

Companies in focus

• Nvidia shares
  NVDA,
  +2.72%
  rose about 2.9%. The graphics chipmaker that recently bolstered its earnings estimates on artificial-intelligence demand announced a flurry of new products over the weekend. AI excitement also bolstered shares of companies including Palantir Technologies
  PLTR,
  +9.34%,
  Advanced Micro Devices
  AMD,
  -1.24%
  and C3.ai
  AI,
  +30.35%.

• Tesla Inc.’s
  TSLA,
  +4.16%
  rose 2.9% as excitement built about Chief Executive Elon Musk’s visit to China, his first in about three years.

• Newell Brands Inc.
  NWL,
  +2.02%
  was up less than 1% after the consumer-products parent company of Rubbermaid and other brands said it was embarking on a restructuring and savings plan intended to “streamline” its North American distribution network. 

— Jamie Chisholm contributed to this article.