Stocks opened higher Friday but quickly reversed course after news emerged that Republican lawmakers and White House officials had reached an impasse in debt ceiling negotiations. These headlines overshadowed a relatively dovish speech from Federal Reserve Chair Jerome Powell, with the three main benchmarks ending the day in the red.
Heading into today, stocks had scored back-to-back wins as lawmakers expressed optimism that a deal could be made on the debt limit. But today, Republican negotiators said recent talks were unproductive, with House Speaker Kevin McCarthy indicating spending levels were a major sticking point.
"Markets quickly sank this morning after Republican lawmakers stepped away from the negotiation table, with GOP Representative Garret Graves claiming the White House team was being unreasonable," says José Torres, senior economist at Interactive Brokers. Despite upbeat comments from political party leadership in recent days, "negotiators appear far apart in reaching a compromise," Torres adds.
Also in focus was a late-morning speech from Federal Reserve Chair Jerome Powell. While Powell said the central bank is committed to bringing inflation down to its 2% target, he added that "the risks of doing too much versus doing too little are becoming more balanced." As such, the Fed "can afford to look at the data" as it decides how to proceed with future monetary policy.
Powell also said that interest rates might not have to go much higher after the recent regional banking crisis created tighter lending conditions, which could, in turn, slow the economy. The CME FedWatch tool is currently indicating an 80% chance the central bank will pause its rate hikes at the next Fed meeting in June.
Regional bank stocks stumble
Elsewhere, regional bank stocks tumbled after a CNN report suggested Treasury Secretary Janet Yellen told a group of CEOs that more consolidation is needed within the banking industry. PacWest Bancorp (PACW, -1.9%), Zions Bancorp (ZION, -1.7%) and Western Alliance (WAL, -2.4%) were among those closing lower.
As for the major indexes, the Dow Jones Industrial Average fell 0.3% to 33,426, the S&P 500 shed 0.1% to 4,191, and the Nasdaq Composite gave back 0.2% to 12,657.
Debt ceiling, Nvidia earnings in focus next week
So what's in store for next week? It will be a busy one, that's for sure. The debt ceiling will stay top of mind for investors. Treasury Secretary Janet Yellen said earlier this month that the U.S. could default on its financial obligations as early as June 1 if the debt limit is not raised, and that date is now less than two weeks away.
There is also an onslaught of economic data set to be released – including several updates on manufacturing activity – and a number of speeches from Fed officials. The next Fed meeting is slated for mid-June, so investors are anxious for clues on what the central bank intends to do with interest rates going forward. And the earnings calendar has plenty of notable names to be aware of, including Nvidia (NVDA). While the chipmaker is often seen as one of Wall Street's best semiconductor stocks, updates on its AI initiatives are what investors will be watching for.
