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North American stocks fell on Wednesday as a deal to raise the federal debt ceiling headed toward a crucial vote in Congress, while unexpectedly strong reports on the U.S. labour market and the Canadian economy rattled investors who feared more central bank rate hikes are on the way.

The House of Representatives is expected to vote in the evening on a bill to lift the $31.4 trillion debt limit, a critical step to avoid a destabilizing default that could come early next week without congressional approval.

House passage would send the bill to the Senate, where debate could stretch to the weekend, just before the June 5 date when the government could start to run out of money.

But most analysts foresee the bill’s approval and U.S. President Joe Biden said on Wednesday he expected the debt ceiling bill on his desk by next Monday.

“The bond market liked that there was some fiscal discipline and the equity market liked that it’s not going to hurt growth,” said Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co in Conshohocken, Pennsylvania.

“I don’t think we could have asked for a better outcome.”

However, equity valuations are stretched considering interest rates are high, the economy is slowing and inflation needs to decline further, Conger said.

“Quite frankly, if we’re really slowing down, the market is not offering a free lunch,” he said. “It’s going to be a struggle if inflation is not perceived to be ebbing, which is where we are.”

The Labor Department reported that U.S. job openings unexpectedly rose in April, reflecting persistent labor market strength that suggests pressure on wages and inflation.

Futures traders raised to 70% the probability of a 25 basis points hike at the Fed’s June 13-14 policy meeting. But that likelihood fell to about 32% after comments by Fed officials who are leaning to what some call a “hawkish pause.”

Fed Governor and vice chair nominee Philip Jefferson said skipping a rate hike in two weeks would provide policymakers time to see more data before making a decision. Philadelphia Fed President Patrick Harker also said on Wednesday that for now he is inclined to support a “skip” in rate hikes.

“The recent economic data has not really favored a pause in rate hikes,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “But we’ve had a number of Fed governors coming out this afternoon and saying a pause is either likely or certainly possible.”

The Labor Department’s closely watched May unemployment report, due on Friday, could decide whether a rate hike occurs.

The major indices pared some losses after the comments by Fed officials.

The Dow Jones Industrial Average fell 134.51 points, or 0.41%, to 32,908.27; the S&P 500 lost 25.69 points, or 0.61%, at 4,179.83; and the Nasdaq Composite dropped 82.14 points, or 0.63%, to 12,935.29.

For the month, the S&P 500 rose 0.26%, the Dow lost 0.3.48% and the Nasdaq gained 5.80%.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 167.46 points, or 0.9%, at 19,572.24, its lowest closing level since March 24. For May, it lost 5.2%, its biggest monthly decline so far in 2023.

“The overriding theme remains inflation and interest rates,” said Michael Sprung, president at Sprung Investment Management.

“It certainly sounds like another increase in the U.S. would not be out of the question and that would put Canada in a position where it would have to follow suit.”

Separate data showed that Canada’s economy grew 3.1% in the first quarter, faster than expected, bolstering bets for another BoC rate hike.

“The one bright light is that you can pick up some pretty attractive yields right now, particularly on the financials and a number of the utilities,” Sprung said.

Heavily weighted financials fell 1.1%, with National Bank of Canada down 2.8% after the bank missed earnings estimates.

Energy lost 2% as weak economic data from top oil importer China pressured crude prices. U.S. crude oil futures settled nearly 2% lower at US$68.09 a barrel.

Shares of Centerra Gold Inc surged 9.8% after the bullion miner said it received an official approval for its Öksüt mine in Turkey.

Teck Resources Ltd shares gained 2.3% after a report saying that Glencore Plc was working on a potential improvement to its bid for the Canadian miner.

Technology-led gains have put the Nasdaq on track for its best performance in May since 2020.

The Federal Deposit Insurance Corporation said U.S. banks’ total deposits declined by a record 2.5% in the first quarter after two large bank failures.

The S&P 500 financial sector index fell 1.1%, with banks taking the brunt with a 2.0% slide.

Advance Auto Parts Inc plunged 35.0%, falling the most on the S&P 500, after the auto parts retailer cut its full-year forecasts.

Shares of other autoparts makers including Genuine Parts Co , Autozone and O’Reily Automotive fell 5.6%, 2.8% and 2.7%, respectfully.

Hewlett Packard Enterprise Co slipped 7.1% after missing Wall Street estimates for second-quarter revenue.

Nvidia Corp’s shares fell 5.7% a day after hitting a record high that briefly boosted its market value above $1 trillion on Tuesday, fueled by bets on the AI boom.

Intel Corp was the biggest gainer on the S&P 500, jumping 4.8% as the chipmaker said it was on track to hit the upper end of its second-quarter revenue forecast.

Intel has risen 14.7% in its biggest three-day rally since March 2009.

Declining issues outnumbered advancing ones on the NYSE by a 1.39-to-1 ratio; on Nasdaq, a 1.37-to-1 ratio favored decliners. The S&P 500 posted four new 52-week highs and 23 new lows; the Nasdaq Composite recorded 36 new highs and 182 new lows.

Reuters, Globe staff

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