(Bloomberg) -- Stocks climbed on signals that American lawmakers are making progress on debt-ceiling talks and will be able to avert a first-ever default. Treasury yields rose on speculation the Federal Reserve will need to keep interest rates higher for longer as inflation remains elevated.
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The S&P 500 hit a nine-month high — closing within a whisker of 4,200. Tech outperformed, with the Nasdaq 100 rallying almost 2% to the highest since April 2022. The Dow Jones Industrial Average trailed major benchmarks, with a gain of 0.3%. Wall Street’s fear gauge, the Cboe Volatility Index, tumbled.
House Speaker Kevin McCarthy and Senate Majority Leader Chuck Schumer are making plans for votes in the coming days on a bipartisan deal to avert a US debt default. Equities briefly pared gains Thursday after one key McCarthy ally, Financial Services Chairman Patrick McHenry, tempered expectations for a quick agreement, saying the two sides are “not close to being done.”
“We could see some volatility over the negotiations in the coming days,” said Dan Clifton at Strategas. “Negotiators are not only trying to get a deal quickly, but the effort is to get a complete deal so that only one debt ceiling increase is needed.”
Stocks, Liquidity and TGA
The Treasury’s cash balance dropped to $68.3 billion as of May 17, according to data published Thursday. That’s down from from $94.6 billion a day earlier and $140 billion at the end of last week. The Treasury’s bank account has been under downward pressure recently because of measures being taken to avoid breaching the $31.4 trillion debt cap.
As the US cash flow position deteriorates, Strategas’ Clifton also highlighted the impact of larger liquidity injections.
“As tax revenues underperform, Treasury is spending down the Treasury General Account. This is leading to more liquidity and, not coincidentally, Nasdaq outperforming the S&P 500,” he added.
Treasury Secretary Janet Yellen told top bank executives that a failure to raise the debt ceiling would be “catastrophic” for the financial system, reiterating that the matter should be addressed without delay.
Fed Rate Bets
Meantime, traders amped up wagers on a June central bank hike to about 40% after Fed Bank of Dallas President Lorie Logan said the case for a pause next month is not clear. In contrasting remarks, central bank Governor Philip Jefferson outlined the dovish case for patience.
Treasuries sold off across the curve. The two-year bond yield, which is more sensitive to imminent Fed moves, approached 4.3%. The dollar closed at the highest since March, climbing against all of its developed-market peers.
The Fed is “in a really tough spot,” Katerina Simonetti at Morgan Stanley Private Wealth Management, told Bloomberg Television. “The big decision for them is the timing because once they announce that they’re done raising rates, markets are just going to assume that they’ve succeeded. And it might not necessarily be the case. Inflation so far is proving to be sticky.”
Friday’s OpEx
About $1.7 trillion of derivatives contracts tied to stocks and indexes are scheduled to expire Friday, according to data compiled by Goldman Sachs Group Inc. strategist John Marshall.
The monthly event, known as OpEx, typically obliges traders to either roll over existing positions or start new ones. That usually involves portfolio adjustments that lead to a spike in trading volume and sudden price swings.
Key events this week:
Japan CPI, Friday
ECB President Christine Lagarde participates in panel at Brazil central bank conference, Friday
New York Fed’s John Williams speaks at monetary policy research conference in Washington; Fed Chair Jerome Powell and former chair Ben Bernanke to take part in panel discussion, Friday
Some of the main moves in markets:
Stocks
The S&P 500 rose 0.9% as of 4 p.m. New York time
The Nasdaq 100 rose 1.8%
The Dow Jones Industrial Average rose 0.3%
The MSCI World index rose 0.6%
Currencies
The Bloomberg Dollar Spot Index rose 0.6%
The euro fell 0.6% to $1.0774
The British pound fell 0.6% to $1.2410
The Japanese yen fell 0.7% to 138.69 per dollar
Cryptocurrencies
Bitcoin fell 2.2% to $26,749.92
Ether fell 1.7% to $1,795.95
Bonds
The yield on 10-year Treasuries advanced eight basis points to 3.65%
Germany’s 10-year yield advanced 11 basis points to 2.45%
Britain’s 10-year yield advanced 12 basis points to 3.96%
Commodities
West Texas Intermediate crude fell 1.2% to $71.99 a barrel
Gold futures fell 1.2% to $1,978.70 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Carly Wanna, Isabelle Lee, Peyton Forte and Felice Maranz.
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2023-05-18 20:58:55Z
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