[New York Stock Market] Mixed Close Amid Debt Negotiation Watch... Nasdaq Up 0.5%

The three major indices of the U.S. New York stock market closed mixed near the flat line on Monday, the 22nd (local time), as they monitored discussions on raising the debt ceiling. Amid warnings that a default could occur as early as June 1, U.S. President Joe Biden and House Speaker Kevin McCarthy, a Republican, are scheduled to meet again from 5:30 PM that day.

At the New York Stock Exchange (NYSE) that afternoon, the Dow Jones Industrial Average closed at 33,286.58, down 140.05 points (0.42%) from the previous session. The large-cap S&P 500 index rose 0.65 points (0.02%) to 4,192.63, while the tech-heavy Nasdaq index gained 62.88 points (0.50%) to close at 12,720.78.

Within the S&P 500, communication, real estate, technology, and financial stocks rose, while consumer staples, discretionary, energy, and materials stocks declined. Micron fell nearly 3% after the Chinese government imposed sanctions citing national security threats. Meta Platforms rose more than 1% despite news of a record 1.2 billion euro fine from European Union (EU) authorities. Apple dropped 0.55% following a downgrade in investment rating by Loop Capital. Additionally, PacWest Bancorp, which had been volatile due to concerns over regional banks, surged nearly 20%.

[Image source=Reuters Yonhap News]

Investors are closely watching political discussions on raising the debt ceiling. Negotiations, which had been temporarily stalled due to a deadlock, resumed at the working-level from the previous evening. That afternoon, President Biden and Speaker McCarthy planned to meet directly, drawing attention to whether a breakthrough in negotiations could be achieved. Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, said, "Investors have started to worry about the debt ceiling negotiations," but added, "On the other hand, the economy remains quite strong, and the labor market is really robust."

Speaker McCarthy told reporters a few hours before the meeting, "Time is the most important factor. There are 10 days left," and emphasized, "A decision must be made." He said that if no agreement is reached, the House would work through Memorial Day. He also added that it is still possible to prevent the worst-case scenario of a default on June 1. While the Republican majority in the House opposes raising the debt ceiling without significant government spending cuts as a precondition, President Biden insists that tax reform through increased taxes on the wealthy should be considered.

Currently, the market believes the worst-case scenario of default will not materialize but remains concerned about the uncertainty leading up to it and its repercussions. Steven Ines of SPI Asset Management predicted, "As debt ceiling discussions continue, market sentiment will move in line with the mood in Washington." The previous day, U.S. Treasury Secretary Janet Yellen reiterated a warning that if the debt ceiling is not raised, the default deadline could be as early as June 1.

This week, in addition to the minutes of the May Federal Open Market Committee (FOMC) meeting, several economic indicators closely watched by the Federal Reserve (Fed) will be released, including the April Personal Consumption Expenditures (PCE) price index, the revised first-quarter GDP growth rate, and the preliminary May S&P Global PMI. Investors are expected to seek hints regarding additional rate hikes or possible rate cuts within the year from the FOMC minutes to be released on the 24th. The core PCE for April, scheduled for release on the 26th, is forecasted to rise 4.5% year-over-year and 0.3% month-over-month.

On this day, hawkish remarks from Fed officials supporting tightening weighed on investor sentiment. James Bullard, President of the Federal Reserve Bank of St. Louis and considered a prominent hawk within the Fed, stated at a forum, "To exert sufficient downward pressure on inflation and bring it back to the target (2%) in a timely manner, policy rates need to be raised further," adding, "I think we need two more hikes (of 0.25 percentage points each) this year." This would raise the U.S. benchmark interest rate from 5.0?5.25% to 5.5?5.75%.

Neil Kashkari, President of the Minneapolis Fed, who had previously supported holding rates steady in June, also left room for further tightening. Appearing on CNBC's Squawk Box the same day, Kashkari said, "It's a close call whether to raise rates in June or skip it," warning, "Skipping a hike in June does not mean the tightening cycle is over." He indicated that the Fed could resume hikes anytime depending on inflation and economic conditions. Kashkari emphasized, "If asked whether we might start raising again in July, I would say that is possible," and stressed, "The most important thing is that we do not completely remove that option from the table."

This contrasts sharply with market expectations of a June rate hold. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of that morning, the federal funds futures market priced in about a 75% chance of the Fed holding rates steady in June. Although this is lower than the previous day's 82% due to successive hawkish Fed remarks, it remains high. The probability of an additional quarter-point rate hike stands at around 24%.

The next FOMC meeting, where U.S. monetary policy decisions will be made, is scheduled for June 13?14. Several Fed officials, including Dallas Fed President Lori Logan and Boston Fed President Susan Collins, are scheduled to speak this week, making it critical to watch whether hawkish comments favoring further hikes continue as they did last week.

In the New York bond market, Treasury yields rose. The 10-year U.S. Treasury yield stood around 3.72%, and the 2-year Treasury yield, sensitive to monetary policy, rose to about 4.32%. The dollar index, which measures the dollar's value against six major currencies, remained near 103.2, similar to the previous session.

International crude oil prices edged up. On the New York Mercantile Exchange, June delivery West Texas Intermediate (WTI) crude closed at $71.99 per barrel, up 44 cents (0.61%) from the previous session.