[New York Stock Market] Decline Amid US Debt Negotiation Difficulties... Nasdaq Down 1.26%

The three major indices of the U.S. New York stock market all closed lower on the 23rd (local time) as no significant progress was made again following the previous day's meeting between President Joe Biden and House Speaker Kevin McCarthy regarding the debt ceiling.

At the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 33,055.51, down 231.07 points (0.69%) from the previous session. The large-cap focused S&P 500 index fell 47.05 points (1.12%) to 4,145.58, and the tech-heavy Nasdaq index dropped 160.53 points (1.26%) to close at 12,560.25.

Among the S&P 500 sectors, all ten sectors except energy declined. Energy stocks rose more than 1% supported by the increase in international oil prices. Chevron rose nearly 3% after HSBC upgraded its investment rating, and ExxonMobil, Marathon Oil, and Occidental Petroleum also showed rallies. Vaccine stocks also showed strength, with Moderna rising over 8% and Pfizer up about 2%, amid confirmed concerns over a resurgence of COVID-19 in China.

Broadcom rose 1.2% on news that it signed a multi-billion-dollar contract with Apple for 5G wireless frequency components, while Apple fell 1.52%. Yelp surged nearly 6% after activist investor TCS Capital Management sent an open letter to the board urging exploration of strategic alternatives, including a sale. Meta Platforms, Facebook's parent company, showed slight weakness after reports that it suffered significant losses from selling 'Giphy' due to a UK antitrust authority's intervention. Regional bank PacWest Bancorp rose 3.5%, continuing its upward trend from the previous day.

[Image source=Reuters Yonhap News]

Investors are closely watching political discussions on raising the debt ceiling and the Federal Reserve's (Fed) monetary policy direction amid warnings that a default could occur as early as June 1. Edward Moya, senior market analyst at OANDA, said, "The uncertainty about the exact timing of the X-day (when cash runs out) has unsettled some investors."

President Biden and Speaker McCarthy met the previous afternoon but failed to reach an agreement. The Republican Party, which holds the majority in the House, opposes raising the debt ceiling unless there are significant government spending cuts, while President Biden insists that tax reform through increased taxes on the wealthy should be considered. However, Speaker McCarthy emphasized on the day that "the president and I know the deadline, so we will discuss it daily," signaling continued efforts to prevent default. The Washington Post (WP) reported, citing sources, that the Treasury Department is inquiring with other government agencies about how long payments can be delayed to postpone the default as much as possible.

Currently, the market believes the worst-case scenario of default will not materialize but remains concerned about the uncertainty and its repercussions leading up to it. Mohamed El-Erian, chief economic advisor at Allianz, said on CNBC's Squawk Box, "We are sending very negative signals about our ability to manage the economy." Philip Colmar, global strategist at MRB Partners, said, "The debt ceiling issue is weighing on investor sentiment," adding, "If an agreement is reached earlier than expected, it would be good news for the market."

Opinions are divided on whether the Federal Open Market Committee (FOMC) in June will hold rates steady or raise them further. However, the current consensus favors a pause at the June FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that morning, federal funds futures priced in about a 67% chance that the Fed will hold rates steady in June. This is down from about 74% the previous day due to hawkish comments from Fed officials but remains high. The probability of an additional "baby step" rate hike (0.25 percentage points) stands in the low 30% range.

This week, in addition to the May FOMC minutes, several economic indicators closely watched by the Fed will be released, including the April PCE price index and the revised first-quarter GDP growth rate. Investors are expected to look for hints about further rate hikes or possible rate cuts later this year from the FOMC minutes released on the 24th. The April core PCE, scheduled for release on the 26th, is forecast to rise 4.5% year-over-year and 0.3% month-over-month. Attention will also focus on whether Fed officials' speeches during the week continue to emphasize further tightening.

Ben Bernanke, former Fed chair, diagnosed that to reduce inflation, the overheated labor market must cool down, and economic slowdown is inevitable. In a report titled "What Caused Inflation in the U.S. Pandemic Era," released by the Brookings Institution that day, Bernanke cited the pandemic supply shock and government stimulus measures as the causes of the most severe inflation in the U.S. since the 1980s.

He also stated, "To control inflation, it is ultimately necessary to achieve a better balance between labor demand and labor supply," and concluded that "the Fed cannot avoid economic slowdown to bring inflation back to the price stability target." The report was co-authored with Olivier Blanchard, former chief economist at the International Monetary Fund (IMF). The Wall Street Journal (WSJ) reported, "Their conclusion is that for inflation to disappear, the economy must cool, which means the labor market will weaken."

The economic indicators released that day were mixed. S&P Global's preliminary May U.S. Services Purchasing Managers' Index (PMI) was 55.1, the highest in 13 months. In contrast, the May Manufacturing PMI was 48.5, below the 50 baseline. The Philadelphia Fed's non-manufacturing index was -16, marking the third consecutive month in negative territory. April new home sales increased 4.1% to 683,000 units, exceeding the Dow Jones estimate of 668,000 units.

In the New York bond market, the 10-year U.S. Treasury yield hovered around 3.70%, and the 2-year Treasury yield, sensitive to monetary policy, was around 4.32%. Amid heightened concerns over tightening, the 2-year yield briefly surpassed 4.4%, reaching its highest level since March. The dollar index, which measures the value of the U.S. dollar against six major currencies, rose 0.3% to 103.5.

International oil prices rose after the Saudi Arabian energy minister warned speculators. On the New York Mercantile Exchange, July delivery West Texas Intermediate (WTI) crude oil closed at $72.91 per barrel, up 86 cents (1.19%) from the previous day. An OPEC+ meeting of oil-producing countries is scheduled for the 4th.

This content was produced with the assistance of AI translation services.