Last week, Wall Street was sparked by concern after the University of Michigan released a preliminary reading showing a six-month low in consumer sentiment.

As the United States approaches its "X date," the government could default without an increase in the debt limit to cover its expenses. Ongoing debt ceiling negotiations are taking place, with little progress made so far in negotiating positions over the debt limit. Both sides have reiterated their stances in the discussions, and another meeting is scheduled on Tuesday. However, most market participants believe progress is being made as staff meets daily.

The debt ceiling should be raised to cover spending commitments already approved by Congress and the President, to prevent default. House Republicans have stated that they will not lift the limit without future spending cuts agreed upon by Biden and lawmakers. While the White House is willing to discuss spending cuts, they would negotiate on the debt ceiling with Republicans, arguing that it is their constitutional responsibility to raise the borrowing limit.

The Treasury Department has taken extraordinary measures to keep paying the government's bills. Still, Janet Yellen warned on Monday that failing to hike the debt ceiling would cause an "economic catastrophe." She expects to avoid a first-ever default until early June.

The Fed has not indicated that it plans to cut or hike in 2H, and there is doubt the Fed will do so. If the central bank lowers rates soon, it is believed to be due to further turmoil with banks or a sudden recession. However, evidence for a significant impact remains surprisingly limited, two months after the Silicon Valley Bank failure.

Rates market participants are most concerned about the risk of banking turmoil triggering a near-term recession. But if the US economy continues to grow, the unemployment rate remains below 4%, and underlying inflation comes down only slowly, the Fed officials are likely to keep rates unchanged at what they view as a restrictive level well into 2024.

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Fullerton Markets Research Team
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