Market Update - May 27

Index level performance was mixed, yet action under the surface skewed more positive. Still, there was not a lot of conviction on either side of the tape. Uncertainty about the debt ceiling remains front of mind for market participants.

Over the weekend, Treasury Secretary Janet Yellen reiterated in an interview that early June is a "hard deadline" for the debt ceiling and that the odds the US can pay all its bills on June 15 are "quite low" without a debt ceiling increase, according NBC News. House Speaker Kevin McCarthy, though, told reporters that it's possible to get a deal tonight or later this week, according to CNBC.

There was also some commentary from Fed officials for market participants to digest. Minneapolis Fed President Kashkari (FOMC voter) said in a CNBC interview that a decision to pause in June is a close call, adding that if the Fed pauses in June, it does not mean the tightening cycle is over. St. Louis Fed President Bullard (not an FOMC voter) said he thinks two more rate hikes are needed this year, according to Bloomberg.

Stocks didn't have an outsized reaction to the aforementioned catalysts. The major indices clung to fairly narrow ranges for the entire session, sporting only modest gains or declines. The S&P 500 briefly peaked above 4,200 on a few occasions on Monday, but couldn't maintain a posture above that level, which has offered stern resistance since last August. Like Friday, the S&P 500 closed Monday's session slightly below 4,200.

Gains in some of the mega caps, along with a strong showing from bank stocks, offered some support to the broader market. 

The SPDR S&P Bank ETF (KBE) rose 2.4% and the SPDR S&P Regional Banking ETF (KRE) gained 3.2%. This comes after PacWest Bancorp (PACW) disclosed it entered into a loan purchase and sale agreement with a unit of Kennedy-Wilson Holdings (KW) to sell a portfolio of 74 real estate construction loans with an approximate $2.6 billion aggregate principal balance currently outstanding.

There was no U.S. economic data of note on Monday.

Relative softness from the mega cap space in the early going limited index performance, yet moves below the surface were still somewhat modest. Some mega caps came back from early losses to close with a gain, offering a boost the major indices. Meta Platforms (META) maintained its outperformance throughout the session after it was upgraded to Buy from Hold at Loop Capital. The Vanguard Mega Cap Growth ETF (MGK) closed with a 0.2% gain.

The continued inclination to buy mega cap stocks reflected the anxiousness in the market related to uncertainty about the debt ceiling. This comes ahead of President Biden's meeting with congressional leaders on Tuesday to further discuss the debt ceiling.

Regional bank stocks had a nice rally, acting as a source of support for the broader market. The SPDR S&P Regional Banking ETF (KRE) logged a 3.2% gain and the S&P 500 financials sector (+0.8%) closed near the top of the leaderboard.

Some M&A activity that featured premium valuations provided added support to the broader market. Namely, Newmont (NEM) plans to acquire Newcrest for approximately $19 billion in a cash-and-stock deal, and Oneok (OKE) plans to acquire Magellan Midstream Partners (MMP) for approximately $18.8 billion, including assumed debt.

There was also some positive action on the regulatory front after EU regulators approved Microsoft's (MSFT) acquisition of Activision (ATVI).

Monday's economic data was limited to the New York Fed Empire State Manufacturing Survey for May, which plunged to -31.8 (Briefing.com consensus -1.8) from 10.8 in April. The dividing line between expansion and contraction for this survey is 0.0. The key takeaway from the survey is that the new orders index sank 53 points to -28.0, underscoring a sharp drop off in demand in May.

The stock market spent most of the morning little changed from Monday's closing levels. Mega cap stocks had been a drag on the main indices for the entire session, yet the broader market was holding up okay.

Things started to deteriorate, though, as market participants learned from press reports that a debt ceiling deal was not imminent. House Speaker McCarthy told House GOP members that they are nowhere near a deal, according to Punchbowl News, while House Minority Leader Jeffries told reporters there is not a lot of progress being made on the debt ceiling. Also, Representative McHenry told reporters that both sides still have "significant differences on spending."

Also, reports about a new Covid wave sweeping through China also impacted sentiment, as optimism about China's reopening activity took a hit.

The S&P 500 energy sector (+1.0%) was alone in positive territory by the close. Chevron (CVX) offered a boost to the sector after it was upgraded to Buy from Hold HSBC. The consumer discretionary sector (-0.9%) was a relative outperformer, partially supported by a gain in Lowe's (LOW) after the company reported earnings.

Reviewing Tuesday's economic data:

• The IHS Markit Manufacturing PMI fell to 48.5 in the preliminary May reading from 50.2. The IHS Markit Services PMI rose to 55.1 in the preliminary May reading from 53.6.
• New home sales increased 4.1% month-over-month in April to a seasonally adjusted annual rate of 683,000 units (Briefing.com consensus 660,000) from a downwardly revised 656,000 (from 683,000) in March. On a year-over-year basis, new home sales were up 11.8%.
  • The key takeaway from the report is that higher mortgage rates are impeding stronger new home sales activity, evidenced by the sales declines in the higher-priced Northeast and West regions that reflect increased affordability pressures created by the higher mortgage rates.

The major indices closed near their worst levels of the day, though, after the S&P 500 and Dow Jones Industrial Average slipped to new session lows shortly after the news hit that President Biden will be cutting his G-7 trip short, skipping his Australia stop to return Sunday, according to NBC News.

There was no information about Tuesday's debt ceiling meeting between President Biden and congressional leaders before the close; however, House Speaker McCarthy said after the close that the two sides are still very far apart. Senate Majority Leader Schumer, meanwhile, said that everyone agreed that we need to be bipartisan and that having a bipartisan bill in both chambers is the only way we can avoid a default.

If not for gains in the mega cap space, losses would have been more pronounced by the close. The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.4% while the Vanguard Mega Cap Growth ETF (MGK) logged a 0.1% gain.

The DJIA registered the steepest decline among the major indices, partially weighed down by Home Depot's (HD) loss. Home Depot disappointed with its fiscal Q1 sales, comp sales, and FY24 guidance.

On a related note, market participants received retail sales data for April Tuesday morning. That report featured a 0.4% increase in total retail sales for April, but retail sales are not adjusted for inflation. Total retail sales were basically flat after adjusting for inflation, suggesting weaker demand than the headline number might imply.

China also reported some weaker-than-expected retail sales, along with weaker-than-expected industrial production and fixed asset investment data for April, playing into lingering concerns about the pace of global growth.

The FTC filed a lawsuit to block Amgen's (AMGN) acquisition of Horizon Therapeutics (HZNP), which was a big drag on that stock and added another headwind for equities.

Reviewing Tuesday's economic data:

• April Retail Sales 0.4% (Briefing.com consensus 0.7%); Prior was revised to -0.7% from -1.0%; April Retail Sales ex-auto 0.4% (Briefing.com consensus 0.3%); Prior was revised to -0.5% from -0.8%
  • Retail sales are not adjusted for inflation, so the key takeaway from the report is that total retail sales were up in April due primarily to price increases and not as much to increased demand.
• April Industrial Production 0.5% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.4%; April Capacity Utilization 79.7% (Briefing.com consensus 79.8%); Prior was revised to 79.4% from 79.8%
  • The key takeaway from the report is that manufacturing output bounced back in April, paced by a strong gain in the output of motor vehicles and parts that still defies a hard-landing scenario for the economy.
• March Business Inventories -0.1% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.2%'
• May NAHB Housing Market Index 50 (Briefing.com consensus 45); Prior 45

Debt ceiling uncertainty led to another weak showing for equities on Wednesday, building on Tuesday's losses. The X-date is quickly approaching, possibly as early as June 1, yet reports indicate that debt ceiling negotiations hit an impasse.

Those reports were somewhat corroborated by House Speaker McCarthy who told reporters that debt ceiling negotiations are still far apart on a number of issues, but that talks would continue. He added that he's not giving up and is hoping for progress.

Market participants were also contending with some lingering rate hike worries after Fed Governor Waller (FOMC voter) said in a speech on policy rate hikes that "we need to maintain flexibility on the best decision to take in June... fighting inflation continues to be my priority." The market also received the Minutes from the May 2-3 FOMC meeting on Wednesday, which didn't contain anything too surprising.

Concerns about rate hikes took a back seat, though, to debt ceiling angst, which fueled a broad retreat. The major indices all closed in negative territory, albeit off their worst levels of the day. There was a somewhat short lived rebound in the late afternoon that saw the main indices approaching session highs. That move higher appeared to be driven by a buy program with all 11 S&P 500 sectors moving up in tandem and no other news to account for the improvement.

The major indices all pulled back again, however, ahead of the closing bell. Market breadth skewed negative with decliners leading advancers by a greater than 3-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq.

The consumer discretionary sector (-0.2%) saw the slimmest decline on Wednesday. The sector was partially supported by Amazon.com (AMZN) along with outperforming homebuilder components. This came after Toll Brothers (TOL), although not a sector component, reported earnings.

Other notable outperformers following pleasing earnings and/or guidance included retailers Urban Outfitters (URBN), Abercrombie & Fitch (ANF), and Kohl's (KSS). On the flip side, Analog Devices (ADI) was a top laggard following its disappointing guidance, dragging down other semiconductor stocks in sympathy. The PHLX Semiconductor Index fell 1.7%.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Application Index dropped 4.6% with purchase applications falling 4.0% and refinance applications dropping 5.0%.
• The weekly EIA Crude Oil Inventories showed a draw of 12.46 million barrels versus a build of 5.04 million barrels last week.

Gains were driven by some positive responses to earnings and other corporate news, along with an emerging hope that the president and congressional leaders are more aligned with debt ceiling negotiations. Still, no deal has been reached and uncertainty remains in play for market participants. That uncertainty, though, was not enough to offset Wednesday's relatively strong showing, which had a pro-cyclical bias.

An uptick in single-family starts and single-family building permits in April, along with the Atlanta Fed's GDPNow model estimate for real GDP growth in the second quarter increasing to 2.9% from 2.6%, helped drive the cyclical trade.

Many stocks came along for the rally, leading nine of the 11 S&P 500 sectors to close with a gain. The financials sector sat atop the leaderboard, up 2.1%. This came after Western Alliance (WAL) said its deposits have increased by more than $2 billion since the end of the first quarter. This news put a bid in the bank stocks, which was aided by short-covering activity. The SPDR S&P Regional Bank ETF (KRE) jumped 7.4%.

Reviewing Wednesday's economic data:

• The MBA Mortgage Applications Index fell 5.7% with purchase applications declining 4.8% and refinancing applications dropping 8.0%.
• Total housing starts increased 2.2% month-over-month in April to a seasonally adjusted annual rate of 1.401 million (Briefing.com consensus 1.405 million) from a downwardly revised 1.371 million (from 1.420 million) in March. Single-family starts were up 1.6% month-over-month, but only because of a strong 59.5% increase in the West; single-family starts declined in all other regions.
• Building permits declined 1.5% month-over-month to 1.416 million (Briefing.com consensus 1.438 million) from an upwardly revised 1.437 million (from 1.413 million) in March. Single-unit permits rose 3.1% month-over-month, led by gains in all regions. The weakness in permits was driven by a 9.7% decline in permits for 5 units or more.
  • The key takeaway from the report is that single-family starts and permits were up, which is a welcome sign given the tight supply of existing homes for sale. Even so, the constraints of high financing rates and high prices are evident in single-unit starts being down 28.1% year-over-year and single-family permits being down 21.2% year-over-year.
• The weekly EIA Crude Oil Inventories showed a build of 5.04 million barrels after last week's build of 2.95 million barrels.

The major indices had a mixed showing on Thursday as participants dealt with mixed news catalysts. Chief among the news catalysts was NVIDIA's (NVDA) huge gain after reporting better-than-expected fiscal Q1 results that featured spectacular fiscal Q2 revenue guidance.

NVIDIA's results fueled buying interest in other semiconductor and mega cap stocks, offering a lot of support to the broader market. The Nasdaq 100 jumped 2.5% while the Nasdaq Composite and S&P 500 rose 1.7% and 0.9%, respectively. The Invesco S&P 500 Equal Weight ETF (RSP), though, declined 0.1%. The Dow Jones Industrial Average also fell 0.1%.

Still, market breadth reflected underlying weakness due to ongoing angst about the debt ceiling. Decliners led advancers by a 9-to-5 margin at the NYSE and a better than 2-to-1 margin at the Nasdaq.

That angst, though, seemed to dissipate somewhat as the session progressed. Before the open, it was reported that Fitch Ratings put the nation's AAA rating on Credit Watch Negative. It was also reported that Congressional members will leave Washington for Memorial Day, but were warned that they should be ready to return on 24 hours notice if a debt ceiling deal is reached.

Later reports emerged that seemingly calmed some nervousness around the debt ceiling. Negotiators are close to a deal on a "slimmed-down" debt ceiling, according to Bloomberg. Also, Republicans and Democrats are narrowing differences on the debt limit, according to Reuters.

Market participants were also digesting some relatively pleasing U.S. economic data. The initial jobless claims report showed continued strength in the labor market and Q1 GDP was revised up to 1.3% from 1.1%. This was in contrast to some weak data out of Germany, which reported its second straight quarter of contraction in GDP, stoking global growth concerns.

Reviewing Thursday's economic data:

• The second estimate for Q1 GDP was revised up to 1.3% (Briefing.com consensus 1.1%) from the advance estimate of 1.1% and the GDP Price Deflator was revised up to 4.2% (Briefing.com consensus 4.0%) from the advance estimate of 4.0%.
  • The key takeaway from the report is that consumer spending remained strong (+3.8%) in the first quarter in spite of the ongoing inflation pressures.
• Initial claims for the week ending May 20 increased by 4,000 to 229,000 (Briefing.com consensus 247,000). The prior week saw a downward revision to 225,000 from 242,000. Continuing jobless claims for the week ending May 13 decreased by 5,000 to 1.794 million.'
  • The key takeaway from the report is that initial jobless claims are nowhere near recession levels. They continue to register in a manner that connotes tight labor market conditions.

Mega cap stocks led the charge, again, with several names reaching new 52-week highs. Microsoft (MSFT), Alphabet (GOOG), Meta Platforms (META), and NVIDIA (NVDA) were the standouts in that regard.

The midday lull was presumably a reflection of ongoing hesitancy about the debt ceiling. House Speaker McCarthy said he "sees a path" to getting the debt limit bill on the House floor for a vote next week, yet other press reports suggest a debt ceiling deal won't be easy to reach.

Market participants were also reacting to some mixed economic data, including lower-than-expected weekly initial jobless claims, a better-than-expected Philadelphia Fed Index for May, and weaker-than-expected existing home sales and leading economic indicators for April.

Nonetheless, the afternoon rally was fairly broad based, ratcheting up as the mega cap stocks took another leg higher along with the semiconductor stocks. The PHLX Semiconductor Index jumped 3.2%.

Reviewing Thursday's economic data:

• Weekly Initial Claims 242K (Briefing.com consensus 259K); Prior 264K; Weekly Continuing Claims 1.799 mln; Prior was revised to 1.807 mln from 1.813 mln
  • The key takeaway from the report is that initial claims are at levels that are much closer to signaling tightness in the labor market, which means the Fed is apt to stick to its tighter policy for longer.
• May Philadelphia Fed Index -10.4 (Briefing.com consensus -16.0); Prior -31.3
• April Existing Home Sales 4.28 mln (Briefing.com consensus 4.30 mln); Prior was revised to 4.43 mln from 4.44 mln
  • The key takeaway from the report is the recognition that the inventory of existing homes for sale remains tight, which is due in part to the strength of the labor market (and ability to work remotely) and the jump in mortgage rates that is deterring existing home owners' interest in moving.
• April Leading Indicators -0.6% (Briefing.com consensus -0.5%); Prior -1.2%

The stock market closed out the week on an upbeat note. Angst about the debt ceiling seemingly eased somewhat following reports that a debt ceiling agreement could be near, although no such agreement was announced before the close. Also, mega caps continued to rally, boosting index performance, and economic data pointed to continued resilience for the U.S. economy.

The Vanguard Mega Cap Growth ETF (MGK) rose 1.9% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.8%. The market-cap weighted S&P 500 gained 1.3% and closed above 4,200 -- at its highest level since last August.

Semiconductor stocks also continued to rally, driving a 6.3% gain in the PHLX Semiconductor Index (SOX). This came after Marvell (MRVL) reporting pleasing earnings and guidance. For the week, the PHLX Semiconductor Index gained 10.7%, leaving it up 18.4% for the month.

Notably, the rally was not deterred by rising expectations of a 25 basis points rate hike at the June FOMC meeting. According to the CME FedWatch Tool, there is a 66.5% probability of a 25 basis points rate hike in June, up from 51.7% yesterday and 13.7% a month ago. This followed this morning's data, which showed continued strength in the economy, helping to quell worries about a hard landing.

Reviewing Friday's economic data:

• Personal income increased 0.4% month-over-month in April (Briefing.com consensus 0.4%) following a 0.3% increase in March. Personal spending increased 0.8% month-over-month (Briefing.com consensus 0.4%) following an upwardly revised 0.1% increase (from 0.0%) in March. The PCE Price Index increased 0.4% month-over-month (Briefing.com consensus 0.3%) and was up 4.4% year-over-year versus 4.2% in March. The core-PCE Price Index, which excludes food and energy, was up 0.4% (Briefing.com consensus 0.3%) and was up 4.7% versus 4.6% in March.
  • The key takeaway from the report is the combination of a robust 0.5% increase in real spending and the uptick in the year-over-year rates for the PCE Price Index and core-PCE Price Index. That combination will give the Fed some pause about pausing its rate hikes in June.
• Durable goods orders increased 1.1% month-over-month in April (Briefing.com consensus -1.0%) following an upwardly revised 3.3% increase (from 3.2%) in March. Excluding transportation, durable goods orders declined 0.2% month-over-month in April (Briefing.com consensus -0.1%) following a 0.3% increase in March.
  • The key takeaway from the report is that nondefense capital goods orders excluding aircraft -- a proxy for business spending -- increased 1.4% month-over-month.
• The Advance Intl. Trade in Goods Report for April showed a widening in the deficit to $96.8 billion from an upwardly revised $82.7 billion deficit (from -$84.6 billion) in March. Adv. Retail Inventories jumped 0.2% while Advance Wholesale Inventories declined 0.2%.
  • The key takeaway from the report is on the trade side, which showed exports of goods being $9.5 billion less than march exports and imports of goods being $4.5 billion more than March imports.
• The final University of Michigan Consumer Sentiment Index for May checked in at 59.2 (Briefing.com consensus 57.8) versus the preliminary reading of 57.7. The final reading for April was of 63.5. In the same period a year ago, the index stood at 58.4.
  • The key takeaway from the report is that consumer sentiment was better than the mid-month look, yet sentiment worsened versus April as worries about the economic outlook increased.

Equities seemed to be responding to worries about the debt ceiling and regional banks, though, rather than Mr. Powell's comments. Briefly, Mr. Powell said that inflation is "far above" the Fed's objective, but also said that rates may not have to rise as much because of credit conditions. These views were comparable to what he shared during his press conference following the FOMC meeting earlier this month, so they weren't necessarily surprising.

What was surprising was a tweet from Punchbowl News reporter Jake Sherman that "debt limit talks between the White House and House Republicans have been paused, per multiple sources involved in the talks." Around the same time, CNN reported that Treasury Secretary Yellen told bank CEOs that more mergers might be needed. The latter news stirred some renewed angst in the banking space. The SPDR S&P Regional Banking ETF (KRE) closed with a 1.8% loss.

Ultimately, the major indices were able to climb somewhat off their lows to close with more modest losses; however, the S&P 500 remained pinned below 4,200 on a closing basis.

There was no notable U.S. economic data on Friday.