Weekly Market Insights: Us Debt Ceiling Is Finally Over

President Biden successfully enacted bipartisan legislation to address the debt ceiling, mitigating the risk of a US federal government default. The focus now shifts to assessing the bond market’s reaction and the implications of replenishing the Treasury General Account at the Federal Reserve for liquidity within the banking system.

What you need to know

Equity investors showed optimism as strong job gains alleviated recession concerns, leading to a surge in the S&P 500 by 1.5% and the Nasdaq 100 by 0.7%. The rally was widespread, with all sectors in the S&P 500 experiencing gains, particularly in materials and industrials. Notably, Celanese, 3M, and DuPont saw significant surges of over 8%.

The US nonfarm payroll report for May exceeded expectations, with strong headline gains of +339k and positive wage data. However, the Household survey showed a significant decrease in jobs, resulting in a 0.3% increase in the Unemployment rate. The odds of a June rate hike picked up slightly, but the market still predicts a higher probability for a July rate hike.

The impact on banking liquidity depends on whether the increase in the Treasury General Account comes from a reduction in bank excess reserves or a decrease in the Reverse Repo balances of money market funds at the Fed. The liquidity of the banking system remains unaffected if money market funds choose to finance the acquisition of Treasury bills by reducing investments in the Fed’s Reverse Repos. However, if investors withdraw funds from their bank accounts to purchase Treasury bills, it would deplete banking liquidity.

What’s happening in Singapore

In Singapore, shares opened higher after the US debt default deal, pushing global equities higher. The Straits Times Index (STI) rose by 1.5%, with gainers outnumbering losers. DBS, OCBC, and UOB, the local banks, all experienced gains at the open.