Coming in hot, sort of...
The week past was truly one where there were some key releases of macroeconomic data. There was an abundance of public appearances made by our favorite (and less than favorite) Fed officials. These events were overshadowed completely by the three ring circus that is our nation's capital. The macroeconomic data was for the most part...mixed, at best. That said, most of it did show growth where there had been none prior.
The headline event was the April release for Retail Sales that were released last Tuesday. That print hit the tape at a month over month growth of 0.4%. Nice. Better than what we've seen of late, but unfortunately far short of the 0.8% or so that most Wall Street economists were looking for. April Industrial Production, also released on Tuesday, surprised to the upside, at monthly growth of 0.5%.
Away from these two data-points, some of the other data-points released were not quite as positive. Both the Empire State and Philadelphia Fed Manufacturing surveys for May printed last week. Both hit the tape in a state of contraction, the Empire State exceedingly so. April prints for Housing Starts and Existing Home Sales, both for the month of April, narrowly missed consensus view as Business Inventories for March and the Conference Board's Leading Indicators both moved into or remained in contraction.
For financial markets, the week was really all about getting a bi-partisan deal done across both bodies of the US Legislature and getting a bill to President Biden's desk for an autograph in time to avoid a US sovereign default that could come (crash land) as soon as June 1st. Positive signals had been sent by leading members of both parties throughout the week, with the highlight being House Speaker Kevin McCarthy expressing hope that a deal could be reached in principle by the weekend that just concluded.
That hope was of course dashed on Friday when some Republican legislators walked out of active discussions. It appears that the view from the left is that decelerating growth in spending should be enough to pacify the fiscal hawks, while the view from the right appears to be that actual spending cuts are required. For that reason, equities traded higher for most of the week, but sold off just a bit on Friday.
What do I think? While austerity would damage growth, not trying to draw down the excess deficit spending of the last 25 years, but especially during the pandemic era may damage the US economy more severely. While maintaining that I have no love for either of our major political parties, I am indeed a fiscal hawk at heart. Funny how the party embracing my position on this matter always seems to be the party out of power.
Like a Plague of Locusts
As mentioned above, our central bankers were out in force last week. Dallas Fed Pres. Lorie Logan indicated that in her opinion, further rate hikes might be required going into June and beyond. Though Logan threw the first serious punch, a series of Fed heads followed her lead and plainly admitted that inflation has not been whipped. At least not yet. Fed Gov. Phillip Jefferson seemed to be almost a lone voice in the wilderness in his apparent willingness to let the lag effect run its course with the expected tightening of credit conditions by lenders in response to this spring's regional banking semi-crisis.
On Friday, Fed Chair Jerome Powell spoke publicly, and he did not sound quite as hawkish as did most of his subordinates, save Jefferson. Powell acknowledged that rates may not have to rise as much as they may have had to, thanks to the condition of the nation's regional banks. Powell left open the possibility for a rate hike on June 14th, but also left Fed watchers wondering if maybe a "skip" were in order rather than a pause in the tightening trajectory of monetary policy. Since Powell spoke, Minneapolis Fed Pres. Neel Kashkari seems to have fallen in line with the potential for this idea.
Fed Funds Futures
As these zero-dark hours pass on Monday morning, I currently see Futures trading in Chicago that show an 82% likelihood of there being no rate change made to the target range for the Fed Funds Rate when the FOMC next meets on June 14th. Bear in mind that this market has been extremely volatile for about a week now, and these probabilities are changing almost by the moment. There is currently an 18% probability for a 25 basis point rate hike that day.
The Fed Funds Rate now stands at 5% to 5.25%, which appears for now to still be the likely terminal rate. These markets are now pricing in a pause at this level that lasts until November 1st, when a first rate cut is projected. As I have been telling anyone who will listen, Jackson Hole should be quite impactful this year. That could be where an actual change in policy such as an overt pause is signaled.
Futures are currently projecting that the November 1st rate cut would be the first of five consecutive meetings where the FOMC eases policy in that way. A Fed Funds Rate of 4.5% to 4.75% is priced in at this point for year's end, and 3% to 3.25% for 18 months from now.
Readers will note that for the week ahead, the Fed will once again... come out swinging with a number of Fed speakers set to appear publicly early in the week and the Minutes for the May 3rd policy decision due for publication this Wednesday afternoon.
First quarter earnings season is winding down to its conclusion. That said, last week saw the bulk of the retailers start to report in earnest with several more set to release their quarterly financial results this week. A couple of issues have come to light so far. Most of the nation's largest retailing chains seem to be meeting what were somewhat tempered expectations, but with weakened balance sheets. Shrinkage due to the still growing national crime wave is really starting to impact the profitability of these firms as well.
That said, according to FactSet, 95% of the S&P 500 has now reported their first quarter results. That's up from 92% a week ago. Of those, 78% have beaten expectations for earnings (flat from last week) and 76% (up from 75% a week ago) have beaten revenue projections. For the quarter, the blended (results & projections) rate of earnings "growth" now stands at -2.2% (up significantly from -2.5% last week) from the year ago comp. Q1 Revenue growth currently stands at 4.1% (up from 4.0% last week).
Taking a look at the current quarter, still using data provided by FactSet, consensus is for earnings "growth" of -6.4% (seems lower every week) on revenue "growth" of -0.3%. For the full year, consensus view is for earnings growth of 1.0% (flat from last week) on revenue growth of 2.4% (up from 2.3%).
Among sectors, the strongest earnings growth this season has been shown by Consumer Discretionaries (now +53.9%), with Industrials a very distant second place (+22.5%). Six of the 11 sectors are still showing year over year earnings contractions, with Materials (-25.3%), Utilities (-22.3%), Health Care (-16.3%), Communication Services (-12.9%) and Technology (-10.4%) all contracting by double digits in percentage terms.
Equity markets, for the most part, were stronger last week. Several indexes now either trading at or close to 52 week highs or have retaken key moving averages. That said, trading volume remains weak, and breadth remains narrow. Interestingly, the Nasdaq Composite posted a very positive week, as the S&P 500 made about half of the move in percentage terms that the Nasdaq did, and the Dow Industrials had to be nudged to the upside.
The Nasdaq Composite appears to have broken out after taking its recent line of resistance the week prior to last. We had doubts last week that the index could hold those gains. Those gains were indeed held... and then some.
The line of focus for the S&P 500 had been its 21 day EMA (Exponential Moving Average). The index is also showing signs of having possibly broken out. The move away from that line will keep all hands on-sides, unless there is bad news out of DC this week.
For the week past, the S&P 500 gained 1.65%, after shedding just 0.14% on Friday. The S&P 500 closed out the week up an impressive 9.18% year to date. The Nasdaq Composite soared into the win column for the week (+3.04%) after surrendering just 0.24% on Friday. This put this index up 20.94% for 2023. Party! The Philadelphia Semiconductor Index had been the market beast this year, and that was certainly the case again last week. The "SOX" gave up 0.62% on Friday, but still closed up an incredible 7.76% for the five day period. This index now stands up 26.51% for the year. Parteeee!
This leaves us with the Russell 2000. The small-cap index gave back 0.62% on Friday, but still managed a gain of 1.89% for the week. The Russell is now up a mere 0.71% for 2023. Bifurcated market much? Try "trifurcated'"
We have obviously had to keep a close eye on the KBW Bank Index for the past few months. The KBW may have given back 0.96% on Friday, but steamed ahead by 5.81% for the week. The KBW is now off "just" 23.79% this year.
Seven of the 11 S&P sector-select SPDR ETFs shaded green for the week. This despite seven of 11 going red on Friday. For the week, performance truly was trifurcated. Technology (XLK) and Communication Services (XLC) led the way, gaining 4.33% and 2.85%, respectively, as investors flowed into "growthy" type sectors. Cyclical sectors took places three through seven, as the investing public started to once again believe that a soft landing for the US economy might develop. Sectors considered to be defensive in nature took the bottom four places on the weekly performance tables. The Utilities (XLU) at -4.23% were hit especially hard.
According to FactSet, the S&P 500 now trades at 18.3 times forward looking earnings, up from 18.0 times a week ago. This ratio seems to be gaining on the S&P 500's five year average of 18.6 times, while remaining well above its ten year average of 17.3 times.
The Week Ahead
It doesn't get easier this week. Was it supposed to? The focus will once again be on political posturing and political theater and its impact on the US and global economies as well as on financial markets. The Fed will be heard from this week, but not to the same degree as last week. However, earnings season will more or less come to a close with a flourish as many well known retailers as well as a few other high profile firm's put their quarterly numbers to the tape.
From a macroeconomic perspective, the headline events will be April New Home Sales on Tuesday as well as April Durables Goods Orders on Friday. Treasury Secretary Janet Yellen is set to speak on Wednesday morning. As far as corporate events, Microsoft (MSFT) will kick off that firm's three day developers' conference this Tuesday. This may be the event of the week outside of "the district." We do know that there will be a segment at this conference that will feature Nvidia (NVDA) , generative AI and the Nvidia Omniverse on Azure.
Regarding earnings, on Tuesday, Dick's Sporting Goods (DKS) , Lowe's (LOW) and Palo Alto Networks (PANW) will all report. Wednesday will bring us results from Nvidia (coincidence?) and Snowflake (SNOW) . Thursday will be the busiest earnings day of the week with Best Buy (BBY) and Dollar Tree (DLTR) releasing their numbers ahead of the opening bell, and Costco (COST) , Marvell Technology (MRVL) , RH (RH) , and Ulta Beauty (ULTA) reporting after the close.
Economics (All Times Eastern)
No significant domestic macroeconomic data-points scheduled for release.
The Fed (All Times Eastern)
08:30 - Speaker: St. Louis Fed Pres. James Bullard.
10:50 - Speaker: Richmond Fed Pres. Tom Barkin.
10:50 - Speaker: Atlanta Fed Pres. Raphael Bostic.