It is easy to guess that the MCP23S17 only detects a high reading if the voltage goes above a certain threshold. I believe when the led turns on, it draws a few mA, which pulls the sensor wire to a lower voltage.
It will help if you install a transistor to detect the signal. Then the transistor turns on the led by means of current drawn from the power supply.
Or, does the MCP23S17 have a spare pin that you can connect the led to, and not interfere with the sensor reading?