Wall Street Ends Mixed Amid Debt Ceiling Crisis and Signs of Easing Inflation

The overall index of consumer sentiment fell 9.1% to 57.7 in May (preliminary reading) from 63.5 in April. This is its lowest level since November as views on both current economic conditions and expectations have worsened. Long-term inflation expectations for the next five to ten years have therefore risen to 3.2% from 3.0% to reach their highest level since 2011.

U.S. consumers appear worried about the slowing economy and the consequences of the political standoff over the debt ceiling. Yet, there were some hopes of progress on talks between President Biden and congressional leaders to avoid the U.S. default on its debt payments. On the inflation front, the Consumer Price Index (CPI, all items) rose 4.9% for the 12 months ending April. This is the smallest 12-month increase since the period ending April 2021.

Against this backdrop, Wall Street's major stock indexes closed mixed. There is a strong sense that it’s time for stock markets to pause for breath. The benchmark S&P 500 index was down 12.99 points week-over-week, or 0.29%, at 4,124.08. It failed in breaking the resistance at around 4,150, hovering mostly around the flatline.

The tech-heavy Nasdaq Composite added 49.33 points, or 0.40%, to 12,284.74, on signs of easing inflation. By contrast, the Dow Jones Industrial Average suffered a second weekly loss (-1.11% at 30,300.64), weighed down by banks (American Express – AXP - and Goldman Sachs – GS), Dow Inc (DOW), and Walt Disney (DIS). The latter plunged 8.49% following its quarterly report.

In Europe, the MSCI EMU dropped 0.35% while the FTSE 100 edged down 0.31%. In Asia, Japan’s Nikkei 225 index rose 0.79%, extending its winning streak to five weeks. Japan’s stock market still looks cheapest against book value. Furthermore, April was the fourth month of a slowdown in producer prices with the lowest producer inflation since August 2021 which should lead to less pressure on the Bank of Japan to tighten its monetary policy this year. Softer-than-expected Chinese inflation data pointed to a slowing economic rebound in Asia’s largest economy. China’s Shanghai Composite Index lost 1.86%. By contrast, India’s Nifty 50 index gained 1.36%, boosted by heavy buying in banking, financial, and auto stocks with continuous foreign fund inflows.

Communication Services driven up by Alphabet (GOOG) stocks

The share price for Google’s parent company Alphabet gained 11.03% over the week, as the social-media giant unveiled a major update on its artificial intelligence platform to improve its search algorithm. Given its weight within the S&P communication services index, the latter outperformed the broad-based indexes (up 4.34%) as well as the other S&P sectors. The consumer discretionary sector also managed to finish the week in positive territory (+0.61%) as Amazon.com (AMZN) rallied (+4.35%) despite the decline in consumer sentiment.

The other sector indexes closed the week in the red. As was the case last week, energy (down 2.16%) pushed the broader market lower. Oil prices recorded a fourth consecutive week of decline (WTI crude oil down 1.82% at $70.04 a barrel) on worries that the U.S. economy is losing steam coupled with lingering fears over a slow recovery in China's fuel demand. The second biggest drag within the S&P 500 index was the materials sector, down for the fourth week in a row (-1.99%) amid weak economic outlook. Once again, financials were under pressure (down 1.35% for the week) as regional banks continued to feel the heat. PacWest (PACW) led them lower, losing 18.40% week-over-week (down 53.69% month-to-date) after announcing it had pledged more collateral to the Federal Reserve to allow it to borrow an additional $3.9 billion. IT stocks struggled to stay above the flatline but eventually closed lower (-0.33%) in the wake of Apple (APPL down 0.58%) and Microsoft (MSFT down 0.54%).