Debt Ceiling Talks to Move S&P 500 This Week

Stocks declined on Friday as GOP negotiators abruptly paused ongoing debt ceiling discussions, raising concerns about the likelihood of a timely agreement. Despite this setback, the S&P 500 recorded its strongest weekly performance since March.

The Dow Jones Industrial Average fell 109.28 points, or 0.33%, closing at 33,426.63. The S&P 500 slipped 0.14% to 4,191.98, while the Nasdaq Composite declined 0.24% to 12,657.90.

However, all three major indices still posted weekly gains. The S&P 500 rose by 1.65%, and the Nasdaq Composite experienced a 3.04% increase, marking their best weekly performances since March. The Dow saw a modest gain of 0.38%.

Investors had shown optimism on Thursday, anticipating a possible resolution to the U.S. debt ceiling issue. House Speaker Kevin McCarthy's remarks fueled hopes of a forthcoming agreement, possibly as early as next week.

Nonetheless, market sentiment soured on Friday after GOP negotiators withdrew from the debt ceiling meeting. Representative Garret Graves criticized the White House team, deeming them "unreasonable" and stating that further discussions would be futile.

Is a Fed pivot likely in 2023?

On Friday, Federal Reserve Chair Jerome Powell stated that stress within the banking sector could alleviate the need for higher interest rates to control inflation. During a monetary conference in Washington, D.C., Powell highlighted the effectiveness of Fed initiatives in addressing issues at mid-sized banks, which have mitigated potential worst-case scenarios. 

However, he acknowledged that challenges persist at Silicon Valley Bank and other institutions, which could impact the broader economy. Powell noted that while these developments contribute to tighter credit conditions and potentially hinder economic growth, employment, and inflation, they may reduce the need for a significant policy rate increase. 

He emphasized the uncertainty surrounding the extent of this impact. Despite market expectations of a pause in rate hikes, Powell indicated that inflation remains too high, with Fed officials assessing the implications of their policies on inflation levels.

Retail earnings and inflation

Next week, we can expect earnings reports from various retail companies, shedding light on consumer spending during the first quarter. Notable companies include Lowe's (NYSE: LOW), Dick's Sporting Goods (NYSE: DKS), Costco (NASDAQ: COST), Dollar Tree (NASDAQ: DLTR), and The Gap (NYSE: GPS).

Research from FactSet reveals that fewer S&P 500 companies are discussing the possibility of a recession, indicating reduced concerns compared to the previous three quarters. For example, among the companies reporting earnings, only 107 mentioned the term "recession" in their calls, down from a peak of 238 in Q2 2021.

The Bureau of Economic Analysis will release the latest Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge. It is expected that the index rose 0.2% last month, with annual prices increasing by 4.1%. 

Also, housing market updates will include new and pending home sales for April. New home sales are projected to total 660,000, while pending home sales fell 5.2% in March, indicating ongoing pressure on the U.S. housing market despite stabilized mortgage rates and a modest rebound in home prices.

Related: Monetary Support Suggests Bear Market Is Possibly Over