The market moved sharply higher early on Friday morning after the Senate passed a debt ceiling deal that will be signed immediately by President Biden. There was some concern about potential roadblocks, but the deal passed easily and the market is celebrating even though there really is no big surprise.
Now that the debt ceiling issue is over and it has no significant short-term impact on the economy, the market will shift its attention to the Fed and the issue of a hard or soft economic landing.
May jobs data will be reported on Friday morning at 8.30 a.m. ET. It is expected that 190,000 jobs will be created, which is a drop from 230,000 in May. The unemployment rate is expected to tick up to 3.5%, while average hourly wages are predicted to stay hot with an increase of 0.3%.
The Fed recently has signaled that it is likely to pause rate hikes at its next meeting on June 14, but if the jobs news is significantly stronger than expected it could cause some concern that the Fed may shift its view. The logic for a pause is that the lag effect of Fed policy is slowly starting to be felt and it makes sense to give it more time to develop.
The jobs news will cement what the Fed does next, and then the economic debate will be about the extent of the economic slowdown that is developing. Stocks in the retail sector have been indicating that the slowdown is gaining traction, but the frenzy in the AI sector has undermined the economic bulls. It is hard to focus on the issue of a hard economic landing when there is a major technological development such as artificial intelligence that is creating a potentially giant wave of innovation.
The great challenge of the market recently is that there clearly are significant economic challenges as inflation remains sticky and the potential for a recession is significant, but there is also this wave of excitement about AI that is creating a frenzy of buying in a small group of big-caps that drive the indexes and impact sentiment.
The bulls are intently focused on the stocks that are benefiting from AI while the bears are arguing that these few names don't fix all the other economic issues that are still lurking.
We are moving past the debt ceiling issue and will focus again on the Fed and the economy now. There is likely to be increased volatility as the shift occurs.
