Market Update - May 6

The stock market entered the new month on a mostly positive note ahead of another busy week of potentially market-moving events. Investors are eyeing the FOMC decision on Wednesday, the ECB meeting and Apple's (AAPL) earnings report on Thursday, and the April Employment Report on Friday.

Monday's action saw the S&P 500 breach its February high closing level (4,179), hitting 4,186 at its high of the day, but it was unable to maintain a posture above that level by the close. Ultimately, the major indices all closed just below their flat lines. Index level performance was muted by lagging mega cap stocks.

Apple, Amazon.com (AMZN), Alphabet (GOOG), Tesla (TSLA), and Microsoft (MSFT) all registered losses. The Vanguard Mega Cap Growth ETF (MGK) fell 0.2% while the S&P 500 closed flat.

Weak bank stocks were another limiting factor for index performance. The SPDR S&P Regional Banking ETF (KRE) fell 2.8% and the SPDR S&P Bank ETF (KBE) fell 2.2%. This followed news over the weekend that First Republic Bank (FRC) was seized by regulators. Subsequently, the FDIC facilitated a deal whereby JPMorgan Chase (JPM ) acquired a substantial majority of assets and assumed the deposits and certain liabilities of FRC.

Treasuries were weak on Monday following an ISM Manufacturing Index that was improved from last month, but still below 50% -- the dividing line between expansion and contraction -- for the sixth consecutive month.

The energy sector (-1.3%) was the worst performer by a decent margin due to falling oil prices, another manifestation of growth concerns, and losses in Exxon (XOM), which was downgraded to Neutral from Buy at Goldman Sachs. Notably, it was the only sector to move more than 1.0% in either direction.

Reviewing Monday's economic data:

• April IHS Markit Manufacturing PMI - Final 50.2; Prior 50.4
• March Construction Spending 0.3% (Briefing.com consensus 0.1%); Prior was revised to -0.3% from -0.1%
  • The key takeaway from the report is that new single family construction continued to languish; however, there was some notable strength in nonresidential spending to offset that weakness.
• April ISM Manufacturing Index 47.1% (Briefing.com consensus 46.8%); Prior 46.3%
  • The key takeaway from the report is that manufacturing activity remains in a state of contraction, accented by ongoing weakness in new order growth and a quickening contraction in the backlog of orders; nonetheless, the employment index moving back into a state of expansion reflects some equanimity on the manufacturing outlook.

Concerns over an economic slowdown were driving Tuesday's sell-off, along with the surprisingly large fallout in bank stocks on no news. In addition, worries about the debt ceiling weighed on investors' sentiment after Treasury Secretary Yellen warned that the Treasury is unlikely to be able to continue to satisfy all of the government's obligations by June, and potentially as early as June 1.

The S&P 500, which hit 4,186 at its high on Monday, briefly slipped below the 4,100 level on Tuesday. Ultimately, the major indices were able to close off their worst levels of the day, albeit still sporting losses of at least 1.1%.

Tuesday's downbeat price action comes ahead of an FOMC policy decision Wednesday, where a 25 basis point rate hike is expected but the tone of the directive and Fed Chair Powell's remarks is still indeterminate.

The bank stock sell-off was presumably tied to concerns about an economic slowdown weighing on earnings estimates. PacWest (PACW) and Western Alliance (WAL) were some of the biggest losers in the regional bank space; however, even larger banks that had been viewed as potentially benefitting from the fallout in the regional bank industry, like JPMorgan Chase (JPM) and Bank of America (BAC), underperformed the broader market.

Slowdown concerns were fueled by some manufacturing PMI readings for April out of the eurozone that were weaker than March, a JOLTs - Job Openings Report for March that showed openings shrinking to 9.590 million from 9.974 million in February, and a 0.6% decline in nondefense capital goods orders, excluding aircraft, for March.

Global growth concerns also manifested themselves in falling commodity prices. WTI crude oil futures sank 5.4% to $71.72/bbl and copper futures declined 1.6% to $3.87/lb.

In the Treasury market, the nervousness about the debt ceiling issue, an economic slowdown, and the behavior of the bank stocks fueled buying interest in most tenors.

Reviewing Tuesday's economic data:

• March Factory Orders 0.9% (Briefing.com consensus 1.4%); Prior was revised to -1.1% from -0.7%
  • The key takeaway from the report is that factory orders weren't as robust as they appear at first blush. Nondefense aircraft and parts orders, up 78.3%, drove the increase. Excluding transportation, new orders were down 0.7% month-over-month for the second straight month.
• March JOLTS - Job Openings 9.590 mln; Prior was revised to 9.974 mln from 9.931 mln

The stock market registered somewhat modest losses with the major indices all closing near their lows of the day. There was not a lot of conviction in the market ahead of the FOMC policy decision and Fed Chair Powell's press conference.

The market experienced some volatility after participants learned that the FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 5.00-5.25%, which was largely expected. The main indices trended lower, though, as Fed Chair Powell conducted his press conference.

In total, the FOMC decision and press conference wasn't as market friendly as the market had hoped it would be.

Some of the remarks that participants were presumably reacting to included Mr. Powell's acknowledgement that the process of getting inflation back down to 2.0% has a long way to go. He added that if the Fed's inflation forecast is broadly right, it would not be appropriate to cut rates.

That view stands in contrast to what price action in the fed funds futures market is indicating. The fed funds futures market is pricing in three rate cuts before the end of the year, according to the CME FedWatch Tool.

Reviewing Wednesday's economic data:

• The ADP Employment Change showed an increase of 296,000 in April (Briefing.com consensus 142,000) following a revised increase of 142,000 in March (from 145,000).
• The final IHS Markit Services PMI reading for April fell to 53.6 from 53.7.
• The ISM Non-Manufacturing Index for April increased to 51.9% (Briefing.com consensus 51.9%) from 51.2% in March. The dividing line between expansion and contraction is 50.0%, so the April reading reflects continued growth in the services sector at a somewhat faster pace than the prior month.
• The key takeaway from the report is that the majority of respondents are mostly positive about business conditions, yet some see headwinds related to inflation and an economic slowdown. On balance, the views are aligned more at this point with a soft landing outlook than a hard landing.
• The weekly EIA Crude Oil Inventories showed a draw of 1.28 million barrels after last week's draw of 5.05 million barrels.

It was another downbeat day in the stock market on the heels of the FOMC rate hike. The major indices were able to close the session off their lows. For the S&P 500, the 4,050 area stood out as a support zone during Thursday's selling action.

Concerns about central banks overtightening and forcing a sharper economic slowdown drove some of the weakness after several central banks followed the FOMC rate hike yesterday. Namely, the Hong Kong Monetary Authority, the Norges Bank, and the ECB all raised their key lending rates by 25 basis points.

Ongoing issues in the regional bank industry, though, took center stage again after PacWest (PACW) confirmed it's considering strategic options. Worries intensified when the FT reported that Western Alliance (WAL) is also considering strategic alternatives, including a possible sale, yet Western Alliance disputed the report, calling it "categorically false in all respects."

The SPDR S&P Regional Bank ETF (KRE) fell 5.5% and the SPDR S&P Bank ETF (KBE) fell 4.6%.

Nine of the 11 S&P 500 sectors closed in the red with the financials sector (-1.3%) showing the steepest decline. The communication services sector (-1.3%) was the next worst performer due to a sharp loss in Paramount Global (PARA) following its disappointing Q1 results and dividend cut to $0.05 a share from $0.24.

Treasuries settled with gains in most tenors, fueled by flight to safety buying interest despite a discouraging Q1 unit labor cost report and weekly initial jobless claims that continue to run well below recession levels.

Despite an otherwise rough showing for the broader market, there was a successful IPO with Johnson & Johnson's (JNJ) consumer health spinoff Kenvue (KVUE) going public.

Reviewing Thursday's economic data:

• Q1 Productivity-Prel -2.7% (Briefing.com consensus -0.1%); Prior was revised to 1.6% from 1.7%; Q1 Unit Labor Cost-Prel 6.3% (Briefing.com consensus 3.9%); Prior was revised to 3.3% from 3.2%
  • The key takeaway is that weak productivity is feeding into elevated labor costs, which are contributing to elevated inflation and the Fed's thinking that it will have to keep rates higher for longer.
• March Trade Balance -$64.2 bln (Briefing.com consensus -$68.7 bln); Prior was revised to -$70.6 bln from -$70.5 bln
  • The key takeaway from the report is that the relatively weak import activity in March is in keeping with a cooling down of the U.S. economy.
• Weekly Initial Claims 242K (Briefing.com consensus 245K); Prior was revised to 229K from 230K; Weekly Continuing Claims 1.805 mln; Prior was revised to 1.843 mln from 1.858 mln
  • The key takeaway from the report remains the same: initial jobless claims continue to run well below levels seen during prior recessions (i.e. north of 375,000) since 1980.
• The weekly EIA Natural Gas Inventories showed a build of 54 bcf versus a build of 79 bc last week.