The latest round of talks on lifting the debt ceiling ended abruptly on Friday as Republicans expressed frustration on the White House negotiating stance. The news helped reverse modest stock market gains in Friday's session, though that comes after the S&P 500 and Nasdaq rallied to their highest levels since last August.
Friction in debt-ceiling talks is hardly a surprise. Perhaps the bigger surprise was that negotiating had seemed to be going so well earlier in the week. The White House has criticized the GOP-led House bill, which would cut $4.5 trillion in spending for a $1.5-trillion debt-ceiling hike, which it considers a nonstarter.
President Joe Biden isn't about to consider the GOP plan's cut of $570 billion in green-energy tax credits approved as part of the Inflation Reduction Act last year. Yet the White House has signaled openness to significant cuts to the annual budget for government agencies. Adding work requirements for adults without dependent children to qualify for government aid programs has also been on the table.
Debt-Ceiling Deadline
There's no indication that the pause in debt-ceiling talks means the country is headed for default. The earliest possible debt-limit X-date — after which the Treasury Department will run out of flexibility to keep from breaching the borrowing limit — is June 1. If tax receipts come in stronger than feared, it's even possible that a deal could be postponed to August.
However, Wall Street would like to see a deal finalized by early next week, before Congress is set to head out of town.
As long as the S&P 500 and broader market are resilient, Washington may not feel the heat necessary to get a deal done that isn't likely to thrill either side. Unfortunately for investors, that could mean some volatile days ahead.
"We've decided to press pause because it's just not productive," Rep. Garret Graves, R-La., top negotiator for House Speaker Kevin McCarthy, said as he left a White House meeting, the Wall Street Journal reported.
The concern all along has been that conservative House members will insist on a deal that Biden can't accept. With a slim majority, McCarthy can't afford to lose more than four votes.
S&P 500 Reaction
The S&P 500 slipped 0.1% Friday afternoon, after earlier rising 0.3%. For the week, the S&P 500 is still up about 1.7%, so markets are taking the latest news in stride. The Nasdaq was off 0.3% Friday, but still ahead 3% this week. Both the S&P 500 and Nasdaq are trading at 2023 highs.
Regional bank stocks may have contributed to Friday's reversal. CNN reported that Treasury Secretary Janet Yellen told a meeting of bank CEOs that more mergers in the sector may be necessary. The recent mergers have come after equity value has been wiped out.
The SPDR S&P Regional Banking ETF fell 2.2% Friday afternoon, but is still up more than 7% for the week.
