5/26/2023 4:05:14 PM
Stocks entered the week still beholden to headlines coming out of Washington DC. Debt ceiling talks were said to be making progress after disappointment was expressed over the weekend. Sentiment swung on several occasions as both sides expressed frustration, though the negotiations continued without a deal. By Friday the S&P climbed back above 4200 helped in part by a growing belief a deal to raise the debt ceiling through 2024 will be put to a vote next week. Unlike equity markets, T-bill yields continued to climb along with and rates and spreads in general, suggesting bond markets are still positioning for potential issues related to the debt ceiling. Ratings agencies Fitch and DBRS both cut their outlooks for the United States sovereign bond ratings to negative. Wall Street spent considerable brain power on re-examining the playbook from the 2011 US downgrade by S&P, and on developing strategies for clients to hedge portfolios in a similar scenario.
Wednesday’s release of the FOMC minutes did little to change the entrenched narrative that the June meeting is still a close call on whether Fed Reserve officials will decide to pause or skip another 25 basis point rate hike. Friday’s April personal spending and PCE inflation data was notably hotter than expected. The data is likely to support a cadre of Fed hawks who have expressed progress on inflation remains too slow. Those officials have been vocal in messaging that if the Fed chooses hold off on hiking at next month’s meeting it is not a signal they are done. In their view rates are likely to need to go a little higher from here to reach a sufficiently restrictive level. Nevertheless, stock markets continued to look past the hotter than expected inflation data and its implications for rates heading in to the long holiday weekend. Semiconductors and the NASDAQ led the way higher basking in the AI glow of on incredible Nvidia quarterly earnings report. For the week the Dow fell 1%, S&P gained 0.3% and the NASDAQ rose 2.5%.
In corporate news small caps opened the week with a bid after FTSE Russel provided an initial look at expected index additions and subtractions for 2023. MU shares were under scrutiny when management estimated the combined direct and indirect impact on sales from a newly issued China ban could be around 25% of revenue. Toll Brothers posted strong earnings results and talked about how the present landscape is a boon for homebuilders with high rates keeping people locked in their homes buoying demand for new construction. A host retailers submitted results and managements that stood out positively included Abercrombie & Fitch, Urban Outfitters, Ralph Lauren, Elf Beauty, and Guess. Best Buy, Costco, Gap, Kohls and Lowe’s results were not quit as stellar, but perhaps better than many had feared. But by a wide margin Nvidia’s earnings a guidance captivated investors’ imaginations in a way that could only be compared to a select few Apple quarters. The juggernaut saw its market cap surge an astonishing $200B+ towards the $1T mark after the company guided Q2 revenue more than 50% above current consensus. AI talk consumed the street after CEO Huang said he believes we are at the beginning of a ten year mega-cycle referring to AI advancements calling it an "iPhone moment". The very next day Marvell Technology guided FY24 AI segment Rev 'to at least double' y/y and shares surged 30%.