U.S. stocks ended lower and the dollar lost ground on Friday as negotiations to raise the U.S. debt ceiling were put on hold, jarring market participants as they headed into the weekend and the United States moved closer to the deadline to avoid default.
While all three major U.S. stock indexes ended the session modestly in the red, they all notched gains for the week, which was marked by solid economic data and the tail end of a better-than-expected earnings season.
Initial reports that debt ceiling negotiations had reached an impasse rattled markets even as investors were scrutinizing Federal Reserve Chairman Jerome Powell’s remarks in a panel discussion for clues regarding next month’s interest rate decision.
“All eyes are on Washington and investors remain focused on the debt ceiling,” said David Carter, investment specialist at JPMorgan (NYSE:JPM) Private Bank in New York. “It’s a bit like watching a nuclear standoff and hoping the other guy isn’t crazy enough to hit the button.”
In his remarks, Powell said that uncertainties surrounding the lagging impact of past rate hikes and recent bank credit tightening made it unclear whether more monetary tightening will be necessary, Reuters cited.
“Investors are trying to better understand if tighter bank lending due to the regional bank crisis will allow the Fed to at least pause on future rate increase,” Carter added. “This is new territory and (it is) not perfectly clear if the Fed will allow tighter bank lending to replace tighter monetary policy.”
Adding to market volatility, Treasury Secretary Janet Yellen told bank CEOs that more mergers may be necessary to staunch the banking liquidity crisis, according to CNN.
The Dow Jones Industrial Average fell 109.28 points, or 0.33%, to 33,426.63, the S&P 500 lost 6.07 points, or 0.14%, to 4,191.98 and the Nasdaq Composite dropped 30.94 points, or 0.24%, to 12,657.90.
European shares closed higher and the German DAX reached a record high as hopes of progress in U.S. debt ceiling talks boosted investor sentiment. Europe’s trading day ended prior to reports that the talks had stalled.
The pan-European STOXX 600 index rose 0.66% and MSCI’s gauge of stocks across the globe gained 0.13%.
Emerging market stocks lost 0.07%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.18% higher, while Japan’s Nikkei rose 0.77%.
The greenback lost ground against a basket of world currencies after Powell’s remarks hinted at a slightly dovish shift, opening the door to the possibility of a rate hike pause at the conclusion of next month’s policy meeting.
The dollar index fell 0.35%, with the euro up 0.32% to $1.0803.
The Japanese yen strengthened 0.57% versus the greenback to 137.96 per dollar, while sterling was last trading at $1.2446, up 0.31% on the day.
Treasury yields wobbled on debt ceiling worries, but resumed their ascent as another Fed rate hike in June remained possible in the wake of solid economic data and Fed officials reiterating this week that inflation remained too high.
Benchmark 10-year notes last fell 12/32 in price to yield 3.6937% from 3.648% late on Thursday. The 30-year bond last fell 20/32 in price to yield 3.9383%, from 3.901% late on Thursday.
Oil prices edged lower following news that the debt ceiling talks were on pause, raising the possibility of a default that could hit energy demand.
U.S. crude dropped by 0.43% to settle at $71.55 per barrel, while Brent settled at $75.58 per barrel, down 0.37% on the day.
Gold prices advanced as the dollar dipped on renewed concerns of instability in the banking sector and traders slashed bets on another rate hike following Powell’s remarks.
No progress in debt ceiling talks
A second meeting on Friday between White House and Republican congressional negotiators on raising the federal government’s $31.4 trillion debt ceiling broke up with no progress cited by either side and no additional meeting set.
That came at the end of a day of acrimonious talks that were broken off for several hours, with less than two weeks to go before June 1, when the Treasury Department warned that the federal government could be unable to pay all its debts. That would trigger a calamitous default.
The White House acknowledged that “serious differences” remained with Republicans who control the House of Representatives and who have said they will not approve an increase in the federal government’s borrowing limit without agreement on sharp spending cuts.
“There continues to be real … differences between the parties on these issues,” White House spokesperson Karine Jean-Pierre told reporters in Hiroshima, Japan, where President Joe Biden is attending a meeting of leaders of the Group of Seven rich nations.
The lead Republican in the talks said no progress had been made on Friday.
“We had a very, very candid discussion talking about where we are, talking about where things need to be,” Republican Representative Garret Graves told reporters following a second brief meeting in the Capitol with White House officials.
“This wasn’t a negotiation tonight,” Graves said, adding the timing of the next meeting was not set.
He echoed remarks by House of Representatives Speaker Kevin McCarthy that progress needed to be made on changing the “trajectory” of U.S. government deficit spending and rapidly rising debt.
“We have to spend less than the year before,” McCarthy said.
The talks have hung over Biden’s meeting with world powers in Japan.
A second Republican negotiator, Representative Patrick McHenry, said he was not confident the two sides could meet McCarthy’s goal of reaching a deal this weekend, which could then be presented to Congress for passage in coming days.
Senior White House adviser Steve Ricchetti left the meeting room telling reporters that he was “not assessing” the talks.
A meeting earlier on Friday ended abruptly with McCarthy telling reporters there had not been any “movement” from the White House toward Republican demands.
U.S. stocks closed the week on a soft note after news of the stalled negotiations.
Republicans are pushing for sharp spending cuts in exchange for the increase in the government’s self-imposed borrowing limit, a move needed regularly to cover costs of spending and tax cuts previously approved by lawmakers.
Republicans control the House of Representatives by a 222-213 margin, while Biden’s Democrats have a 51-49 Senate majority, making it difficult to thread the needle with a deal that will find enough votes to pass both chambers.
Democrats have been pushing to hold spending steady at this year’s levels, while Republicans want to return to 2022 levels. A plan passed by the House last month would cut a wide swath of government spending by 8% next year.
That plan does not specify what spending would be cut, but some Republicans have said they would shield military and veterans programs. Democrats say that would force average cuts of at least 22% on domestic programs like education and law enforcement, a figure top Republicans have not disputed.
Some Republicans have criticized Biden for taking the trip to Japan at a key point in the talks.
Biden and McCarthy spent most of the year in an impasse with the White House insisting on a “clean” increase in the debt ceiling without conditions. Republicans said they would only vote for a deal that cut spending.
They agreed to two-way talks, with the White House represented by Shalanda Young, director of the Office of Management and Budget, and Ricchetti. McCarthy was represented by Graves and McHenry.
Republicans have taken a hard line. On Thursday, the House Freedom Caucus urged the Senate to vote on a previously passed House bill that would raise the limit through March in exchange for 10 years of sharp spending cuts.
House and Senate Democrats have raised concern over the inclusion in the talks of new work requirements for some federal benefit programs for low-income Americans.
The last time the nation got this close to default was in 2011, also with a Democratic president and Senate alongside a Republican-led House.
Congress eventually averted default, but the economy endured heavy shocks, including the first-ever downgrade of the United States’ top-tier credit rating and a major stock sell-off.
