Stocks Rise as U.S. House Passes Debt Ceiling Bill, Earnings Reports Impact Market

June 2, 2023

Stocks experienced gains as the U.S. House of Representatives successfully passed a debt ceiling bill, reducing the risk of a default. Despite a 4.7% decline in Salesforce shares following their earnings report, the Dow Jones Industrial Average rose by 0.47%, closing at 33,061.57. The S&P 500 and Nasdaq Composite also reached their highest levels since August 2022, with gains of 0.99% and 1.28% respectively. With the debt ceiling issue resolved, investors now turn their attention to the upcoming Federal Reserve policy meeting and the potential impact of rising interest rates.

The bipartisan passage of the Fiscal Responsibility Act, by a vote of 314-117, brought relief to the market by removing a major negative catalyst. The Senate is expected to follow suit, ensuring the bill reaches President Biden’s desk. Analysts suggest that the equity market had already discounted the debt ceiling concerns, shifting focus to the possibility of future interest rate hikes. Meanwhile, positive economic data, including stronger-than-expected private payroll growth and lower-than-forecasted jobless claims, reinforced the market’s optimism about the economy’s recovery. Investors will closely monitor the Federal Reserve’s policy meeting for insights into the central bank’s stance on interest rates.

Data by Bloomberg

On Thursday, the stock market saw overall gains, with all sectors experiencing positive movement except for Consumer Staples and Utilities. The Information Technology sector led the way with a strong increase of 1.33%, followed closely by Industrials, Materials, and Energy, all of which saw gains above 1%. Consumer Discretionary and Communication Services also performed well, with increases of 1.22% and 1.15% respectively. Financials and Health Care sectors showed solid growth as well, with gains of 1.09% and 0.67% respectively. Real Estate had minimal movement, with a slight increase of 0.03%. However, the Consumer Staples sector experienced a slight decline of -0.09%, while Utilities saw a notable decrease of -0.78%.

Major Pair Movement

On Thursday, the U.S. dollar weakened as concerns over the Federal Reserve’s rate hike cycle grew, while optimism surrounding the debt ceiling eased and U.S. economic data indicated a cooling economy. The dollar’s decline was also influenced by positive news from Europe, including better-than-expected economic indicators and the European Central Bank’s potential interest rate hikes. Additionally, the ADP report exceeded expectations, but revisions to previous job data and other economic indicators revealed a slowdown in the U.S. economy.

Investors are closely watching Friday’s payrolls data to gauge the Federal Reserve’s future actions and the impact on the dollar. If the payrolls report continues to outperform expectations, it could lead to a more bearish outlook for the dollar. Currently, a June rate hike by the Fed is seen as unlikely, and the probability of a 25 basis point hike in July is uncertain, while rate cuts are priced in for later in the year.

Meanwhile, the euro strengthened by 0.7% against the dollar, reaching its highest level in six sessions, supported by rebounding yield spreads and oversold charts. Sterling and risk-sensitive currencies like the Australian dollar also gained ground. However, the yen experienced a 0.4% loss due to declining Treasury-JGB yields and a reversal of the overbought uptrend observed in May.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Surges as Dollar Weakens Amid Falling Fed Rate Hike Expectations

The EUR/USD experienced a significant rally on Thursday, propelled by a widespread decline in the US dollar as expectations for Federal Reserve rate hikes diminished ahead of the US employment report. Eurozone data confirmed a slowdown in inflation, providing relief for the European Central Bank (ECB) and reducing the need for further interest rate increases. The weakening dollar was driven by signals from Fed officials suggesting a pause in rate hikes and increasing market expectations of future rate cuts.

Additionally, improved market sentiment, supported by positive Chinese data, the resolution of the debt ceiling issue, and easing inflation data, contributed to the dollar’s decline. Focus now turns to the Nonfarm Payrolls report on Friday, which is expected to provide further insights into the US economic situation.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair is moving higher on Thursday, creating upward momentum towards the upper band of the Bollinger Bands. Currently, EUR/USD is trading near the upper band of the Bollinger Bands. We anticipate that the EUR/USD will experience a slight downward movement today and attempt to reach the middle band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 61, indicating that the EUR/USD has entered the overbought zone.

Resistance: 1.0766, 1.0824

Support: 1.0706, 1.0671

XAU/USD (4 Hours)

Gold (XAU/USD) Rises as US Dollar Weighed Down by Mixed Economic Signals

The US dollar experienced a turbulent day of fluctuations as investors digested news from the United States, resulting in significant selling pressure on the currency and pushing XAU/USD (gold) to trade around $1,980 per troy ounce. The initial optimism surrounding the suspension of the debt-limit ceiling was followed by a brief recovery in the dollar due to positive labor market indicators. However, a downward revision in Q1 Unit Labor Costs and a contraction in the May ISM Manufacturing PMI underscored the fragility of the US economy, weakening the dollar and creating an environment favorable for gold. These mixed economic signals have put the Federal Reserve in a challenging position, with pressure to maintain an aggressive monetary policy while inflation remains subdued.

Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD pair is exhibiting upward movement on Thursday, approaching the upper band of the Bollinger Bands. There is a possibility that the XAU/USD will experience a minor downward correction and retrace towards the middle of the Bollinger Bands throughout the day. At present, the Relative Strength Index (RSI) is at 62, suggesting that the XAU/USD is currently in the overbought zone.

Resistance: $1,984, $2,004

Support: $1,963, $1,951