Debt Ceiling and the Market Impact

Despite Friday’s disappointing jobs report, U.S. equities managed modest gains after the debt ceiling crisis was temporarily postponed. Global central banks continue to express concerns about higher prices but insist interest rate hikes are still far off, preferring to taper bond purchases first. On Wednesday investors will parse through the minutes from the most recent FOMC meeting for additional clues on policy changes. Last week, the Dow finished up 1.27%, S&P up 0.83%, and Nasdaq 0.1%.

Last Week Debt Ceiling Proposal

The S&P 500 Index returned 0.83% last week, regaining some of the previous week’s 2.19% decline. The index is currently up 1.99% for October, a welcomed trend following September’s -4.65%, its worst performance since March 2020. Equites had a rough start to the week as the index declined 1.29% on Monday with the information technology and communication services sectors leading the way down as inflation and growth fears weighed on investors. Markets rallied back on Tuesday and pushed higher through Thursday. Equities received positive news as a $480 billion increase to the debt ceiling was passed by the US Senate allowing the government to continue to operate as usual for a couple more months without a shutdown or default.

After a poor August payroll number, investors looking for strength in employment numbers were disappointed again. The September non-farm payroll data showed an increase of only 194K jobs. Well below the expectations of 500K. However, U.S. initial jobless claims of 326K were lower than the 348K expected and the previous week’s 362K. The unemployment rate also showed positive data as it declined 0.4% to 4.8%, its lowest level since March 2020. However, the labor force participation rate dropped to 61.6% from 61.7%. Overall, the numbers reflect a remarkably tight labor market, as wages increased by 0.6% Month-over-Month and 4.6% Year-over-Year. The weak jobs report led investors to believe it is less likely the Federal Reserve tapers bond purchases. The tapering process is still expected to begin by the end of this year.

Week Ahead

Central banks across the globe continue to express concerns about higher prices, but insist interest rate hikes are still far off. On Wednesday investors will review the minutes from the most recent FOMC meeting for additional clues on policy changes. This week brings inflation data, highlighted by U.S. CPI on Wednesday and PPI Thursday expected to be flat to slightly lower. Germany reports wholesale prices, Japan brings PPI, and China delivers CPI and PPI throughout the week.

On the labor front, U.S. job openings anticipate to tick up to yet another record high. This week will feature the first major Q3 earnings reports. With the large money center banks releasing numbers on Wednesday and Thursday. Financials have been the second strongest sector the past few weeks, boosted by rising yields. Closing out a busy week, U.S. retail sales will reveal how back-to-school shopping fared and if stores were able to stay stocked in the face of supply chain disruptions. The first look at October consumer sentiment also drops Friday.

Year-to-date index performance; Dow up 13.53%, S&P up 16.92%, and Nasdaq up 13.12% through the close on Friday.

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