U.S. equities slumped ahead of a critical inflation report while the debt ceiling impasse dragged on investor sentiment. The dollar edged higher.

The S&P 500 ended Tuesday 0.5 per cent lower with PayPal Holdings Inc. the worst performer on the index after outlook disappointed. The Nasdaq 100 slid 0.7 per cent. Stock gauges have been stuck in narrow trading ranges as traders weigh the potential end of the Federal Reserve’s interest rate hikes against the possibility of an economic slowdown.

Shares of Airbnb fell postmarket after second quarter sales outlook fell short of some analysts’ estimates, suggesting rising prices may be curbing enthusiasm for travel. Rivian Automotive Inc. climbed after the electric-vehicle maker reaffirmed its annual production plans.

Investors are tracking efforts in Washington to end a standoff over the U.S. debt ceiling, with President Joe Biden sitting down with House Speaker Kevin McCarthy Tuesday as the two face pressure to forge a deal.

Both men rejected the idea of a short-term debt-limit extension ahead of the meeting. Treasury Secretary Janet Yellen has warned that the debt limit could be breached as soon as June 1.

“The meeting is unlikely to generate major breakthroughs on the debt-ceiling impasse, though it might finally focus more attention on the issue,” Art Hogan, chief market strategist at B. Riley Wealth Management, wrote. “The most likely scenario is Congress will pass an extension until September 30, when the fiscal year ends. This would set up a larger battle on the 2024 budget and the debt ceiling, all at once.”

STOCKS ADRIFT

The S&P 500 has been stuck trading between 3,800 and 4,200 this year. Equities could finally break out of that range and move higher if, “data points more convincingly towards a soft landing, there are no more regional bank failures, core inflation drops faster than expected, the Fed confirms the pause and a debt ceiling deal is reached,” said Tom Essaye, founder of The Sevens Report newsletter.

Bears, according to Jonathan Krinsky, chief market technician at BTIG, are looking for the benchmark to fall below 3,800.

“The bullish argument is that the market is so resilient and it can’t crack despite all the widely known problems,” Krinsky wrote. On the other hand, “if the market is so strong, why hasn’t it been able to break out above 4,200 despite spending so much time just below it, a VIX that broke below 16, and many tech names up over 20 per cent YTD? The reason is breadth and credit.”

Credit tightening was apparent in a Fed poll of lending officers Monday. The first quarter survey showed demand for loans weakened, heightening recession worries.

Fed officials, including New York Fed President John Williams, are watching for signs of a credit crunch. Williams said he wasn’t including a rate cut in his forecast for this year at an event Tuesday. He left the door open on the odds of a Fed pause. Swaps suggest traders are expecting at least 50 basis points in cuts by the end of 2023.

Sentiment was also dented by a report showing a steep drop in Chinese imports last month, a sign that the economy’s recovery from COVID lockdown isn’t as strong as many had hoped. Oil traded at $73.47 a barrel.

Traders are awaiting the monthly U.S. inflation report, due Wednesday. Economists expect headline CPI to rise by 5 per cent on a year-on-year basis, showing that price pressures are still uncomfortably high for the Federal Reserve.

Yields on the policy-sensitive two-year rose to 4.0 per cent with the 10-year at 3.5 per cent. An index of dollar strength climbed, gold also gained.

PacWest Bancorp ended the day up 2.3 per cent, leading gains among lending peers in the KBW Regional Banking Index.

Key events this week:

• U.S. President Joe Biden scheduled to meet with congressional leaders on debt limit, Tuesday
• U.S. CPI, Wednesday
• China PPI, CPI, Thursday
• U.K. BOE rate decision, industrial production, GDP, Thursday
• U.S. PPI, initial jobless claims, Thursday
• Group of Seven finance minister and central bank governors meet in Japan, Thursday
• U.S. University of Michigan consumer sentiment, Friday
• Fed Governor Philip Jefferson and St. Louis Fed President James Bullard participate in panel discussion on monetary policy at Stanford University, Friday.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 0.7 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index fell 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.1 per cent
• The euro fell 0.4 per cent to $1.0963
• The British pound was little changed at $1.2620
• The Japanese yen was little changed at 135.22 per dollar

Cryptocurrencies

• Bitcoin rose 0.6 per cent to $27,730.97
• Ether rose 0.7 per cent to $1,854.83

Bonds

• The yield on 10-year Treasuries advanced two basis points to 3.53 per cent
• Germany’s 10-year yield advanced three basis points to 2.35 per cent
• Britain’s 10-year yield advanced seven basis points to 3.86 per cent

Commodities

• West Texas Intermediate crude rose 0.4 per cent to $73.48 a barrel
• Gold futures rose 0.4 per cent to $2,041.90 an ounce