Dow ends 370 points lower as Fed decision looms and debt ceiling draws focus

By Frances Yue and Andrew Keshner

U.S. stocks closed sharply lower Tuesday, tumbling under the weight falling shares of regional bank and the energy sector, while weaker data on the jobs market pointed to a slowing economy.

Investors also awaited the Federal Reserve's interest rate decision Wednesday and focused on an early June deadline for raising the U.S. debt ceiling.

How stocks traded

On Monday, the Dow Jones Industrial Average fell 46 points, or 0.14%, to 34052, the S&P 500 declined 2 points, or 0.04%, to 4168, and the Nasdaq Composite dropped 14 points, or 0.11%, to 12213.

What drove markets

Ongoing concerns about regional U.S. banks, the Federal Reserve's policy decision due Wednesday and the deadlock in Congress over raising the U.S. debt ceiling were all putting investors in a risk-off mood.

"There's no shortage of things to be concerned about already," said Mike Loewengart, head of model portfolio construction at Morgan Stanley MS global investment office.

Investors learned on Tuesday that March job openings had decreased to 9.6 million, the lowest since April 2021

"The cooldown in the US labor market is now unambiguous -- it's happening. Job openings are no longer resisting gravity and clearly trending downward as the quits rate continues to moderate," said Nick Bunker, head of economic research at Indeed Hiring Lab.

More data on the labor market is due on Friday with the April jobs report.

In other U.S. economic data, factory orders in March increased 0.9%, lifted by orders for commercial airplanes, but stripping out transportation orders, factory orders were off 0.7% for the second straight month

Investors were also trying to interpret the earnings of big-name businesses. Companies presenting their results on Tuesday included Pfizer PFE and Uber UBER. Advanced Micro Devices AMD, Starbucks SBUX and Ford F are announcing their results after the close. Apple (AAPL), the U.S. market's biggest company, will release its earnings on Thursday.

In addition, investors continued to digest JPMorgan Chase & Co.'s acquisition of First Republic Bank, and what that means for banking-sector health The SPDR S&P Regional Banking ETF (KRE) shed 6.3%, while JPMorgan (JPM) closed 1.6% lower. Shares in certain regional banks, like PacWest Bancorp and Western Alliance Bancorp, booked steep losses Tuesday.

"Sell in May decided it didn't need to wait for the Fed," Edward Moya, senior market analysts at Oanda, said in emailed commentary. "Wall Street is quickly hitting the sell button as banking turmoil appears it is not going away anytime soon and was ready to focus on the next weakest link, potentially distressed lenders with tremendous exposure to commercial real estate."

The Federal Reserve will deliver its monetary policy decision on Wednesday, and traders are pricing a 85% chance that the central bank will hike its policy rate to a 5%-5.25% range.

"The consensus is the Fed will raise key interest rates 25 basis points on Wednesday, which I think is a mistake, especially in the wake of First Republic Bank being taken over by the FDIC and then acquired by J.P. Morgan," according to Louis Navellier, chairman and founder of Navellier & Associates.

"I believe that we are going to get a dovish statement tomorrow, regardless of what the Fed does simply because we are having these banking problems," Navellier said in a podcast Tuesday.

Still, it remains in question as to when the Fed may pause its interest rate hikes and when it might pivot to rate cuts. Federal funds futures traders on Tuesday projected a 59% chance of rate cuts later this year, despite central bank signals that it has no plans to lower rates any time soon.

Also lurking in the background is the escalating debt ceiling drama U.S. Treasury Secretary Janet Yellen said Monday that the federal government could completely exhaust its capacity to pay its bills as early as June 1.

The White House and lawmakers will ultimately avoid default, Loewengart said. But the uncertainty meanwhile isn't helping. "We'll be wrung through the wringer meanwhile," he said.

Read also: Why it might take 'a stock-market meltdown' to resolve the debt-ceiling standoff

Tuesday's deep decline happened while the S&P 500 index sits near the top of the 3,800 to 4,200 range, which it has inhabited for about six months.

Companies in focus

-- Jamie Chisholm contributed to this article.

-Frances Yue

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05-02-23 1707ET

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