US Stocks Slump As Investors Eye Debt Ceiling Standoff, Await Inflation Data: Analyst Predicts Risk-Off Mood Ahead

Zinger Key Points
  • Investor risk aversion increased on Tuesday as the debt-ceiling standoff remains unresolved and the CPI print looms.
  • Fed's William predicts declining growth and inflation, but no room to cut interest rates.

The stock market fell on Tuesday as investors fret over the debt ceiling impasse and remained wary ahead of Wednesday's inflation data.

New York Fed President John C. Williams predicted the unemployment rate could increase to 4%-4.5% this year, while inflation could decline to 3.25% in 2023 and then to 2% by 2025. Williams emphasized that he doesn't expect to cut rates this year. 

Investors are awaiting a meeting between President Joe Biden and House Speaker Kevin McCarthy on Tuesday for potentially critical headlines on the debt limit crisis, as the U.S. Treasury default risk has risen to its highest level since 2009, with only three weeks until the government runs out of cash.

Cues From Tuesday's Trading

All the major averages fell on Tuesday, with the S&P 500 index, the Nasdaq 100 and the Russell 2000 dropping 0.5% each on the day, while the Dow Jones Industrial Average eased 0.2%. 

U.S. Indices’ Performance Wednesday

Index Performance (+/-) Value
Nasdaq 100 -0.53% 13,207.4
S&P 500 Index -0.48% 4,119.25
Dow Industrials -0.22% 33,550.97

Analyst Color:

As the debt ceiling impasse continues, investors may be well advised to be selective in their investment strategy, said Adam Turnquist, chief technical strategist at LPL Financial.

"While we view a default as a very low probability event, headline risk over the next few weeks could weigh on risk sentiment," the analyst said.

"In the event of a prolonged debt ceiling battle similar to 2011, watch for large caps to outperform small caps, growth to outperform value, and defensive sectors to outperform more cyclical sectors," he added.

Tuesday's Trading In Major US Equity ETFs: In midday trading on Tuesday, the SPDR S&P 500 ETF Trust SPY was 0.44% lower to $410.96, the SPDR Dow Jones Industrial Average ETF DIA fell 0.2% to $335.60 and the Invesco QQQ Trust QQQ was 0.6% lower to $321.73, according to Benzinga Pro data.

All the S&P 500 sectors were negative, except for the Industrials Select Sector SPDR Fund XLI, slightly up by a shy 0.1%. 

The Materials Select Sector SPDR Fund XLB was the weakest performer, down 0.9%, followed by the Technology Select Sector SPDR Fund XLK, down 0.7%. 

Latest Economic Data:

Fed Governor Philip Jefferson said that inflation has started to ease while the economy is slowing down in an orderly fashion, remarking that the banking system is sound and resilient. 

The IBD/TIPP economic optimism survey for May came in at 41.6 points, below the 47.4 in April and the 48.2 expected. 

In its most recent short-term energy outlook report, the EIA reduced its 2023 Brent price projection by 7.5%, from $85 to $79, and its 2024 projection by 8.3%, from $81 to $74.

See also: How To Trade Futures

Stocks In Focus:

  • PayPal Holdings, Inc. PYPL fell 12% amid rising concerns on profit margins, although the company reported better-than-predicted results last quarter. 
  • Palantir Technologies Inc. PLTR rallied 21% after it reported an unexpected profit for the first quarter and slightly upped its guidance for the fiscal year.
  • DaVita Inc. DVA soared 14% after a positive earnings report.  
  • Lucid Group, Inc. LCID fell 7% after reporting weaker-than-expected results last quarter. Nikola Corp. NKLA fell 13% after revenues missed expectations last quarter. 
  • Skyworks Solutions, Inc. SWKS
  • Warner Music Group Corp. WMG fell 11% after reporting weaker-than-expected results last quarter. 
  • Regional bank stocks fell, led by First Horizon Corp. FHN, down 4.86%, PacWest Bancorp. PACW, down 4.1%, Western Alliance Bancorp. WAL, down 3.55%, East West Bancorp. EWBC, down 1.7% and Comerica, Inc. CMA, down 1.5%. 
  • The companies reporting after the close include Affirm Holdings, Inc. AFRM, Airbnb, Inc. ABNB, Akamai Technologies, Inc. AKAM, IAC, Inc. IAC, Electronic Arts, Inc. EA, Occidental Petroleum Corp. OXY, Rivian Automotive, Inc. RIVN, Twilio, Inc. TWLO, Plug Power, Inc. PLUG and Wynn Resorts, Inc. WYNN.

Commodities, Bonds, Other Global Equity Markets:

Crude oil fell 0.6%, with a barrel of WTI grade crude falling to $72.45. The United States Oil Fund ETF USO was 0.3% lower to $64.08 per share.  

Treasury yields rose, with the 10-year yield edging 2 basis points up to 3.53% and the two-year yield rising 6 basis points to 4.06%. The iShares 20+ Year Treasury Bond ETF TLT was 0.3% lower on the day. 

The dollar strengthened, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF UUP, up 0.3%. The EUR/USD pair, which is tracked by the Invesco CurrecyShares Euro Currency Trust FXE, fell 0.44% to 1.0955. 

European equity indices all closed in the red, with the iShares MSCI Eurozone ETF EZU falling 1%. Gold rose 0.46% to $2,029/oz. The SPDR Gold Trust GLD rose 0.5% $188.60. Silver held steady at  $25.55, with the iShares Silver Trust SLV flat at $23.48 per share. Bitcoin BTC/USD fell 0.7% to $27,502. 

Staff writer Piero Cingari updated this report midday Tuesday. 

Read Next: Mitch McConnell Rules Out Helping Joe Biden On Debt Ceiling Crisis: ‘They’re Assuming There’s Some Little Secret Plan Here’

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