Wall Street closes down, dollar dips as debt ceiling talks stall

© Reuters. FILE PHOTO: A view of a giant display of stock indexes, following the coronavirus disease (COVID-19) outbreak, in Shanghai, China, October 24, 2022. REUTERS/Aly Song

By Stephen Culp

NEW YORK (Reuters) - U.S. stocks ended lower and the dollar lost ground on Friday as negotiations to raise the U.S. debt ceiling were put on hold, jarring market participants as they headed into the weekend and the United States moved closer to the deadline to avoid default.

While all three major U.S. stock indexes ended the session modestly in the red, they all notched gains for the week, which was marked by solid economic data and the tail end of a better-than-expected earnings season.

Initial reports that debt ceiling negotiations had reached an impasse rattled markets even as investors were scrutinizing Federal Reserve Chairman Jerome Powell's remarks in a panel discussion for clues regarding next month's interest rate decision.

"All eyes are on Washington and investors remain focused on the debt ceiling," said David Carter, investment specialist at JPMorgan (NYSE:JPM) Private Bank in New York. "It's a bit like watching a nuclear standoff and hoping the other guy isn’t crazy enough to hit the button."

In his remarks, Powell said that uncertainties surrounding the lagging impact of past rate hikes and recent bank credit tightening made it unclear whether more monetary tightening will be necessary.

"Investors are trying to better understand if tighter bank lending due to the regional bank crisis will allow the Fed to at least pause on future rate increase," Carter added. "This is new territory and (it is) not perfectly clear if the Fed will allow tighter bank lending to replace tighter monetary policy."

Adding to market volatility, Treasury Secretary Janet Yellen told bank CEOs that more mergers may be necessary to staunch the banking liquidity crisis, according to CNN.

The Dow Jones Industrial Average fell 109.28 points, or 0.33%, to 33,426.63, the S&P 500 lost 6.07 points, or 0.14%, to 4,191.98 and the Nasdaq Composite dropped 30.94 points, or 0.24%, to 12,657.90.

European shares closed higher and the German DAX reached a record high as hopes of progress in U.S. debt ceiling talks boosted investor sentiment. Europe's trading day ended prior to reports that the talks had stalled.

The pan-European STOXX 600 index rose 0.66% and MSCI's gauge of stocks across the globe gained 0.13%.

Emerging market stocks lost 0.07%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.18% higher, while Japan's Nikkei rose 0.77%.

The greenback lost ground against a basket of world currencies after Powell's remarks hinted at a slightly dovish shift, opening the door to the possibility of a rate hike pause at the conclusion of next month's policy meeting.

The dollar index fell 0.35%, with the euro up 0.32% to $1.0803.

The Japanese yen strengthened 0.57% versus the greenback to 137.96 per dollar, while sterling was last trading at $1.2446, up 0.31% on the day.

Treasury yields wobbled on debt ceiling worries, but resumed their ascent as another Fed rate hike in June remained possible in the wake of solid economic data and Fed officials reiterating this week that inflation remained too high.

Benchmark 10-year notes last fell 12/32 in price to yield 3.6937% from 3.648% late on Thursday. The 30-year bond last fell 20/32 in price to yield 3.9383%, from 3.901% late on Thursday.

Oil prices edged lower following news that the debt ceiling talks were on pause, raising the possibility of a default that could hit energy demand.

U.S. crude dropped by 0.43% to settle at $71.55 per barrel, while Brent settled at $75.58 per barrel, down 0.37% on the day.

Gold prices advanced as the dollar dipped on renewed concerns of instability in the banking sector and traders slashed bets on another rate hike following Powell's remarks.

Spot gold added 0.9% to $1,976.04 an ounce.