The week just ended this past Friday really doesn't look like much on the chart. The past five days were a period of subdued volatility and depressed trading volumes for sure. Was this past week a period where traders and investors entered into a state of complacency, and price discovery reflective of some general lack of concern? Maybe instead, what we saw and experienced was more illustrative of some paralyzing state of cautiousness? Outright fear? Hard to tell, really.
The headline events of the week were more macroeconomic than corporate in nature. The investing public started the week off with the Fed's Senior Loan Officer Opinion Survey (SLOOS) report that was published on Monday. Traders had spent last weekend in anticipation of what this report would say about lending conditions across the US economy. What we learned on Monday was that lenders were indeed tightening lending conditions in a fairly broad way, but not quite to the degree that many of us had feared.
That may sound almost positive, or at least less negative than what we had been on the lookout for. However, it does take two to tango. We also learned that demand for credit has been weaker across the commercial and industrial (C&I), commercial real estate (CRE) and even residential real estate categories of borrowers. This is where slowing economic activity would begin if one were to look for it.
At that point, we moved on toward midweek. We found out through the monthly NFIB survey was that in April small business sentiment was at its least optimistic level in aggregate for any one month since way back in 2010. The public entered the week looking toward April CPI and April PPI on Wednesday and Thursday as potential market movers. How much these data-points moved markets is doubtful, but the information provided was invaluable.
For April, consumer prices for the most part printed at consensus, slightly on the cool side for the year over year headline print. However, at the producer level, which can lead consumer prices by several months, inflation is seen cooling quickly. At the producer level, year over year inflation printed not just in a state of deceleration from March levels but also below professional consensus view. Headline CPI and PPI have both now shown headline deceleration for 10 consecutive months.
By Friday, the University of Michigan's preliminary consumer sentiment survey for May took center stage. The survey showed a sharply more distressed US consumer than economists had expected to see. While sentiment plummeted, five year implied inflation expectations increased to the highest level for that series in more than 10 years.
But Wait, There's More...
Last week was not a very busy earnings week. The bulk of corporate earnings had passed. The retailers had not yet gotten started. The highest-profile name that reported last week was the Walt Disney Company (DIS) , and unless you live under a rock, you know how poorly equity markets respond to that report that included a decreased subscriber count for Disney Plus.
In other corporate news, PacWest Bancorp (PACW) sold off more than 22% on Thursday and then sold off some more on Friday after it was learned that the bank had pledged more collateral to allow for increased borrowing from the Fed's discount window, while also disclosing that it had suffered deposit outflows of 9.5% the week prior. This once again pressured financial stocks, and most especially the entire regional banking space.
Still, that was not all. Markets operated last week under the shadow cast by the still not resolved negotiations between the Biden administration and Republican Speaker of the House regarding the nation's debt ceiling and the potential for an actual US default on its own sovereign debt. An expected meeting set for Friday was postponed until this week. The optimistic take would be that staffers for each side were making progress and the two sides postponed in hope that something concrete could be announced. Pessimists saw the postponement as just one more failure at the executive and legislative levels.
Readers must keep in mind that President Biden is scheduled to travel to Asia on Wednesday, so if this meeting is not news by Tuesday, then it likely will not happen this week either.
Quick Thoughts
I don't think one could even debate at this point that US economic activity is not decelerating. The Federal Reserve Bank now has what they had been waiting for. Inflation is visibly slowing across several levels of the economy. First time jobless claims have hit a pocket of serious acceleration. This will result in pressured wage growth.
This is where the famous "lag effect" kicks in. Don't forget that theoretically, we still have six to nine months of lag effect in response to FOMC policies that we have not felt yet. This is where we could enter into what some economists have referred to as a soft landing, meaning that the nation either goes into mild to moderate recession or narrowly misses doing so.
This could also be where it gets worse, and we go into a deep recession, which would be tragic if due to an unforced error. President Biden and Speaker McCarthy had better hold that meeting this week, even if there is no progress to report. Just sitting in the same room won't be enough. They better both walk away knowing exactly where the other side stands. McCarthy has already passed a bill. It might not be realistic, but it is a bid. Counter just as unrealistically if you must, but counter. Don't just walk away.The Central Bank
As these zero-dark hours pass on Monday morning, I currently see Futures trading in Chicago starting to allow for a greater chance that the Fed may not be ready to pause its rate hiking trajectory for monetary policy just yet. These futures markets now show a 79% 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. There is currently a 21% probability for another 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 only pricing in a pause at this level that lasts until September 20th, when a first rate cut is projected (64% probability). If so, I can not wait for the Kansas City Fed's economic symposium at Jackson Hole this coming August. Should be interesting.
Futures are currently projecting that the September 20th rate cut would be the first of seven consecutive meetings where the FOMC eases policy in that way. A Fed Funds Rate of 4.25% to 4.5% is priced in at this point for year's end, and 3% to 3.25% for eighteen months from now.
Readers will note that the week ahead, in particular...The economic calendar for the early part of this week is just inundated with the hordes of Fed speakers. That's something that markets and algorithmic traders have not had available to them over the past couple of weeks outside of the events surrounding the May 2nd policy decision. I have 11 public appearances by Fed officials on my radar for just Monday and Tuesday of this week. Then, this Friday morning, we'll have to deal with the big dog, as Fed Chair Jerome Powell himself will hit the circuit.
Earnings
As far as the first quarter earnings season is concerned, last week (as mentioned above) was rather quiet. Outside of Disney and a few other names, there was not all that much news flow from the corporate side. That changes somewhat this week, as several of the most well known retailers close out the season, which takes about two weeks.
According to FactSet, 92% of the S&P 500 has now reported their first quarter results. That's up from 85% a week ago. Of those, 78% have beaten expectations for earnings (down from 79% last week) and 75% (flat from a week ago) have beaten revenue projections. For the quarter, the blended (results & projections) rate of earnings "growth" now stands at -2.5% (down from -2.2% last week) from the year ago comp. Q1 Revenue growth currently stands at 4.0% (up from 3.9% last week).
Taking a look at the current quarter, still using data provided by FactSet, it appears that analysts are betting against upside performance. Consensus is for earnings "growth" of -6.3% (steadily falling) on revenue "growth" of -0.4%. For the full year, consensus view is for earnings growth of 1.0% (down from 1.2% last week) on revenue growth of 2.3% (down from 2.4%).
Among sectors, the strongest earnings growth this season has been shown by Consumer Discretionaries (Now +53.6%), with Industrials a very distant second place (+21.3%). Six of the 11 sectors are still showing year over year earnings contractions, with Materials (-25.3%), Utilities (-22.3%), Healthcare (-16.3%), Communication Services (-12.8%), and Technology (-10.7%) all contracting by double digits in percentage terms.
Marketplace
Equity markets, for the most part, were broadly weaker last week, not really so much at the headline index level, but more so for specialized and smaller cap indexes. All on continuously narrowing breadth. In other words, the headline level indexes continue to trade close to recent highs even as greater numbers of individual stocks fail to keep up.
Interestingly, the Nasdaq Composite posted a positive week, as the S&P 500 was down small, and the Dow Industrials were down a bit more significantly. In fact, the Dow Industrials, while still considered by some to be a "major" (not by your author) equity index, has decoupled from these other two indexes and has now posted five consecutive red daily candles and nine red candles in the past 10 trading sessions. Fewer and fewer stocks are carrying equity market performance forward. The performance of the Dow 30 reflects this.
The Nasdaq Composite appears to have taken (and held?) the line of resistance that had halted this index on four separate occasions from late March up into last week. Note, though piercing this line from above every day from last Wednesday through Friday, the index has closed above that blue line on all three of those days and that has kept the entirety of the wick of those daily candles above said line. Technically important? Only if it holds this week. Then, we'll have seen resistance become support.
The line of focus for the S&P 500 has been its 21 day EMA (exponential moving average). The index has largely straddled this line for the majority of trading sessions going all the way back to April 25th. What that tells me is that nothing is settled yet as far as the swing crowd is concerned. The S&P 500 remains in play. Portfolio managers will for the most part remain on sides as long as the 50 day SMA (simple moving average) remains unchallenged.
For the week past, the S&P 500 gave up 0.29%, after shedding just 0.16% on Friday. The S&P 500 closed last week up 7.41% year to date. Now, I want you to check this out because I found it very interesting. John Murphy over at StockCharts (dotcom) wrote a piece on Friday afternoon with an eye-catching chart. He compared S&P 500 performance versus the unweighted version of the S&P 500 as a means toward illustrating the sloppy and quite negative market breadth of late. This shows narrowing leadership.
The red line represents the unweighted S&P 500. Readers will see how the S&P 500 and its unweighted cousin moved together until early March when the regional banks jumped off of a cliff. To further illustrate the matter...
.... The percentage of S&P 500 stocks currently trading above their individual 200 day SMAs is back below 50%. This might look as negative as it was in mid-March, but it's a whole lot worse than it was less than a month ago and the trend is lower.
The Nasdaq Composite again just narrowly ended up in the win column for the week (+0.40%) after surrendering 0.35% on Friday. This put this index up 17.37% for 2023. The Philadelphia Semiconductor Index had been the market beast this year, but not of late. The "SOX" had another rough week after having finally put together an "up" week the week prior. The semis gave up 0.2% on Friday to close down 1.16% for the five day period. This index still stands up 17.41% for the year.
This leaves us with the Russell 2000. The small-cap index gave back 0.22% on Friday, closing out the week down 1.08%. All of our smaller cap indices struggled last week. The Russell is now down 1.16% for 2023. We have obviously had to maintain a close watch over the KBW Bank Index since March. The KBW gave up 0.79% on Friday, closing out the week 3.49% lower. The KBW is off 27.97% this year.
Eight of the 11 S&P sector-select SPDR ETFs shaded red for the week with one sector, the Utilities (XLU) ending the week unchanged and two sectors ending the week in the green. This despite seven of 11 of these funds going green on Friday. For the week, Communication Services (XLC) soared 2.37% higher on internet strength as Alphabet (GOOGL) and Netflix (NFLX) both had very strong weeks. Five sector SPDRs gave up at least 1% last week, led lower by Energy (XLE) and Materials (XLB) . Those two ETFs surrendered 2.13% and 1.96% respectively.
According to FactSet, the S&P 500 now trades at 18.0 times forward looking earnings, up nicely from 17.7 times a week ago. This ratio seems to be stabilizing below the S&P 500's five year average of 18.6 times, while remaining above its ten year average of 17.3 times.
On Point
There really is so much for the investing public to remain focused upon this week. While the debt ceiling and political posturing between the parties will remain front and center, the Fed will also be out in force for the first time in a few weeks. Bottom line: This week more so than in the past few weeks, there will be the potential for increased headline risk. Especially early in the week. In case you missed it above, Chair Powell speaks on Friday, so they'll be easing into this weekend.
From a macroeconomic perspective, the headline events will be April Retail Sales and April Industrial Production, both on Tuesday. Manufacturing will be a focus as we hear from the New York (Monday) and Philadelphia (Thursday) regional Fed districts. Housing will be another focus with April data for Housing Starts landing Wednesday and Existing Home Sales on Thursday.
Regarding earnings, on Tuesday, Home Depot (HD) reports. On Wednesday, Target (TGT) , TJX Cos (TJX) hit the tape, On Thursday, we'll hear from Walmart (WMT) and Applied Materials (AMAT) . The week culminates on Friday morning, when both Deere (DE) and Foot Locker (FL) release their numbers. There are not a lot of names reporting. However, there are a number of household names that will make noise, thus upping the potential for a market response.
Word to the Wise...
Would the Fed be out in this kind of force early in the week if there were not some kind of message to be sent? Ahead of Retail Sales and Industrial Production? While the nation waits on any fiscal news from DC? Equity index futures are strong on Monday morning in anticipation of something positive. I would keep my guard up.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (May): Expecting -2.7, Last 10.8.
16:00 - BNet long-Term TIC Flows (Mar): Last $71B.
The Fed (All Times Eastern)
08:45 - Speaker: Atlanta Fed Pres. Raphael Bostic.
09:15 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
12:30 - Speaker: Richmond Fed Pres. Tom Barkin.
17:00 - Speaker: Reserve Board Gov. Lisa Cook.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (TSEM) (.47)
(GOOGL, XLE, AMAT and DE are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
