Market Update - June 17

The stock market had a slightly positive bias in the early going, but really started to build up steam in the afternoon. Ultimately, the S&P 500 closed at its highest level since April 21, 2022, aided by chasing action and a possible fear of missing out on further gains.

Stocks shifted into rally-mode as market rates declined after the Treasury market did a good job absorbing nearly $200 billion worth of bills and notes, eyeing another $101 billion scheduled to be sold on Tuesday. The 2-yr note yield, which reached a high of 4.63% overnight, fell to 4.56% before settling the session at 4.59%. The 10-yr note yield, which reached a high of 3.79%, pulled back to 3.73% and settled at 3.77%.

Mega cap stocks were in a leadership position, again, with many other stocks also coming along for the rally. The Vanguard Mega Cap Growth ETF (MGK) rose 1.5% and the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.7%. The market-cap weighted S&P 500 closed with a 0.9% gain.

The energy sector was the worst performer, down 1.0%, as oil prices fell ($67.09/bbl, -3.21, -4.6%). This was in response to Goldman Sachs cutting its Brent crude forecast to $86.00/bbl from $95.00/bbl and its WTI crude forecast to $81.00/bbl from $89.00/bbl, citing higher oil supplies.

Economic data on Monday was limited to the May Treasury Budget, which showed a deficit of $240.3 billion compared to a deficit of $66.2 billion in the same period a year ago. The deficit in May was the result of outlays ($547.8 billion) exceeding receipts ($307.5 billion). The Treasury Budget data is not seasonally adjusted so the May 2023 deficit cannot be compared to the April 2023 surplus.

• The key takeaway from the report is that the level of outlays was the second highest in fiscal 2023.

Tuesday's trade was decidedly upbeat. The major indices all closed near their best levels of the day, paced by the Russell 2000 (+1.2%). There were a few positive catalysts supporting the upside bias, but Tuesday morning's pleasing CPI report was the biggest driving factor.

That report seemed to corroborate that market's view that the Fed will not raise rates tomorrow and diluted expectations of a rate hike in July. Presently, the fed funds futures market is pricing in a 5.8% probability of a rate hike tomorrow (versus 18.5% just before the CPI report) and a 64.2% probability of a rate hike in July (versus 71.0% just before the CPI report).

The price action today was indicative of a belief that the Fed may not overtighten after all and force a worse economic outcome than necessary to bring inflation back down to its 2.0% target. That belief led to a more pro-cyclical trade and led to the outperformance of the Russell 2000, which is comprised of mostly smaller, domestically-oriented companies. Additionally, value stocks outpaced growth stocks in Tuesday's session.

Reviewing Tuesday's economic data:

• The May NFIB Small Business Optimism Survey rose to 89.4 from 89.0 in April
• Total CPI was up 0.1% month-over-month in May (Briefing.com consensus +0.2%). Core CPI, which excludes food and energy, increased 0.4% month-over-month, as expected, driven by a 0.6% increase in the shelter index and a 4.4% increase in the index for used cars and trucks.
• On a year-over-year basis, total CPI is up 4.0%, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
  • The key takeaway from the report is that inflation rates are moving in the right direction, although core inflation in particular will still be viewed by the Fed as "too high," which is why the prospect of another rate hike in July will be kept alive.

The major indices hung around in fairly narrow ranges until the much anticipated FOMC decision at 2:00 p.m. ET and Fed Chair Powell's press conference at 2:30 p.m. ET induced some whipsaw action.

The FOMC voted unanimously to hold the target range for the fed funds rate steady at 5.00-5.25%, yet stocks declined with the release of the Summary of Economic Projections, which showed an upward adjustment in the 2023 median estimate for the fed funds rate to 5.60% from 5.10%.

The market started to climb again as Fed Chair Powell's press conference got underway. Stocks recovered after Fed Chair Powell said that the July meeting is a "live" meeting (for looking at a possible policy change), but one that isn't being pre-determined.

In other words, a rate hike in July isn't a sure thing. Note that there are four more FOMC meetings this year (July, September, November, December), so the Fed doesn't have to frontload an additional 50 basis points of rate hikes. Arguably, the stock market is making some allowance for the possibility that the Fed might not push the policy rate as far as the dot-plot suggests it might go this year.

The Dow Jones Industrial Average (-0.7%), held down by a sizable loss in UnitedHealth (UNH) after the company warned of rising costs, and the Russell 2000 (-1.2%) lagged the other major indices.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index rose 7.2% with purchase applications jumping 8.0% and refinancing applications rising 6.0%.
• The Producer Price Index for final demand declined 0.3% month-over-month in May (Briefing.com consensus -0.1%) while the index for final demand, less foods and energy ("core PPI) increased 0.2% month-over-month, as expected.
• On a year-over-year basis, the index for final demand was up 1.1% year-over-year, versus 2.3% in April, and the index for final demand less foods and energy was up 2.8% year-over-year, versus 3.2% in April.
  • The key takeaway from the report is the recognition that wholesale inflation is moving in the right direction, which should be pleasing to the Fed and a reprieve for corporate profit margins.
    Weekly EIA crude oil inventories showed a build of 7.92 million barrels following last week's draw of 451,000 barrels.

It was a decidedly strong day for the stock market. The major indices opened somewhat soft, but quickly shifted into rally mode as investors digested a heavy batch of economic data. Many stocks contributed to index gains, likely fueling a flat squeeze as investors employed cash from the sidelines due to a fear of missing out on further gains.

Ultimately, the major indices all closed near their highs of the day, which had the S&P 500 above 4,400 and the Dow Jones Industrial Average up by more than 400 points.

Thursday morning's economic data was mixed in aggregate but featured a modest 0.1% increase in May retail sales, excluding autos, the highest four-week moving average for initial claims since November 20, 2021, and some welcome year-over-year deflation in import and export prices.

Treasuries settled with gains across the curve in response the data, which is seen as a sign of confidence that the Fed is done, or close to being done, raising rates. The 2-yr note yield was down six basis points to 4.64%. The 10-yr note yield was down seven basis points to 3.73%. The drop in market rates was a big support factor for equities.

The strong response to CAVA Group's (CAVA) IPO also helped boost investor sentiment. The quick-casual Mediterranean restaurant operator opened at a huge premium of $42/share after pricing its IPO at $22/share.

Reviewing Thursday's economic data:

• Total retail sales increased 0.3% month-over-month in May (Briefing.com consensus 0.0%). Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus +0.1%).
• The key takeaway from the report is that spending was flat or up in May across nearly every retail category with the exception of gasoline stations (-2.6%) and miscellaneous store retailers (-1.0%), which speaks to the enduring spending capacity of U.S. consumers who continue to be bolstered by a strong labor market.
• Initial jobless claims for the week ending June 10 were unchanged at 262,000 (Brieifng.com consensus 251,000). Continuing jobless claims for the week ending June 3 increased by 20,000 to 1.775 million.
• The key takeaway from the report is that initial jobless claims have elevated in recent weeks, yet they remain well below levels north of 375,000 that have been seen in all recession since 1980.
• The June Philadelphia Fed Index slumped to -13.7 (Briefing.com consensus -13.0) from -10.4 in May.
• The key takeaway from the report is that June was the tenth consecutive negative reading, pressured by another negative reading for the new orders index (to -11.0 from -8.9).
• The June Empire State Manufacturing Survey surged to 6.6 (Briefing.com consensus -16.0) from -31.8 in May.
• The key takeaway from the report is that the index for future business conditions jumped to 18.9 from 9.8, which is the second consecutive increase and suggests firms have become more optimistic about conditions improving over the next six months.
• May import prices declined 0.6% month-over-month following a downwardly revised 0.3% increase (from 0.4%) in April. Excluding fuel, import prices were down 0.1% following an unchanged reading for April. Export prices declined 1.9% month-over-month following a downwardly revised 0.1% decline (from 0.2%) in April. Excluding agricultural products, export prices declined 1.8% following a downwardly revised 0.1% decline (from 0.2%) in April.
  • The key takeaway from the report is the deflation seen in import prices year-over-year (-5.9%), nonfuel import prices year-over-year (-1.9%), export prices year-over-year (-10.1%), and non-agricultural export prices year-over-year (-10.5%).
• Total industrial production declined 0.2% month-over-month in May (Briefing.com consensus +0.1%) following an unrevised 0.5% increase in April. The capacity utilization rate slipped to 79.6% (Briefing.com consensus 79.7%) from an upwardly revised 79.8% (from 79.7%) in April.
  • The key takeaway from the report is that manufacturing output remained positive in May, helping to offset weakness in mining and utilities output.
    Business inventories rose 0.2% in April (Briefing.com consensus 0.2%) following a revised 0.2% decline in March (from -0.1%).
• The weekly EIA natural gas inventories showed a build of 84 bcf versus a build of 104 bcf last week

The stock market closed out this quarterly options expiration day on a downbeat note, but losses were still relatively slim when considering the big move up recently. The major indices spent most of the session oscillating around their flat lines before finding some downside momentum in the afternoon trade. Ultimately, they settled near their lows of the day. The S&P 500 for its part was able to maintain a posture above 4,400 on a closing basis.

Treasuries also settled with losses despite the preliminary University of Michigan Consumer Sentiment Index for June revealing a sharp drop in year-ahead inflation expectations to 3.3% from 4.2% -- the lowest since March 2021. The 2-yr note yield rose seven basis points to 4.71%. The 10-yr note yield rose four basis points to 3.77%. The move up in yields acted as a headwind for mega caps and other growth stocks.

Mega caps had an outsized influence on index losses, but many other stocks also contributed. The Vanguard Mega Cap Growth ETF (MGK) fell 0.6% and the market-cap weighted S&P 500 fell 0.4%.

Pleasing earnings and guidance from Adobe (ADBE), along with Morgan Stanley naming NVIDIA (NVDA ) its top pick in AI and raising its price target to $500 from $450, continued to drive an AI buzz. That buzz, however, was not enough to offset underlying weakness in the market, which still managed to record its fifth straight winning week.

Friday's economic data was limited to the preliminary University of Michigan Consumer Sentiment Index for June, which checked in at 63.9 (Briefing.com consensus 60.2) versus the final reading of 59.2 for May. In the same period a year ago, the index stood at 50.0.

• The key takeaway from the report is that an easing in year-ahead inflation expectations underpinned a pickup in consumer sentiment; however, the report notes that a majority of consumers still expect difficult times for the economy over the next year.