US Stocks Could Drop with Extended Debt Ceiling Drama

The US30 index failed at key resistance and may face risks from the debt ceiling or the banking sector.

US30 – Daily Chart

US30 – Daily Chart

The Dow Jones failed at 34,100 and could head lower with negative debt ceiling sentiment.

On Wednesday, the Federal Open Market Committee (FOMC) raised interest rates by 25 basis points for the third time this year, marking a tenth consecutive hike.

The latest move comes after cooling inflation data. The CPI posted a sharp slowdown from February to March, with inflation dropping from 6% to 5%. However, the Federal Reserve is focused on wage and salary growth.

“We’re very focused on getting inflation down,” Powell said last month. “And because we know in the long run that is the thing that will most benefit the people we serve.”

Democratic lawmakers don’t agree with Powell as ten Democrats wrote a letter to Powell urging him to pause interest rate hikes “and avoid engineering a recession that destroys jobs and crushes small businesses.”

Bank Jitters Send US Markets Lower

Markets were on alert after the collapse of First Republic Bank in the US, with fears that another wave of regional bank collapses was coming. However, JP Morgan’s takeover of the troubled bank has stabilised matters.

US Senate Republicans on Tuesday asked President Joe Biden to accept their debt-ceiling package or make a counter-offer. At the same time, a top Democrat said the Senate might try to advance a “clean” debt-ceiling hike next week.

With less than a month before a possible US default, leaders of both parties toughened their stance over the $31.4 trillion debt ceiling. Republicans said Democrats needed to seriously consider Speaker Kevin McCarthy’s legislation that passed the House of Representatives last week. 

Billionaire investor Stanley Druckenmiler said the US spending situation “looks much worse than I had imagined 10 years ago”. The legendary investor said that the biggest issue facing the US is runaway entitlements such as Social Security, Medicare, and Medicaid, which without cuts today, will have to be cut in the future. 

The Dow Jones index has a bearish threat from the debt ceiling drama in the coming weeks.

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