Late Thursday night, the US Senate passed by a tally of 63 to 36 the Fiscal Responsibility Act, where the actual responsibility in federal spending going forward remains quite questionable but does eliminate the possibility of a US sovereign default until early 2025. The bill passed in bipartisan fashion in both houses of the US legislature and goes to President Joe Biden's desk to be signed into law a few days ahead of an estimated June 5 deadline. As this is the deal that was negotiated by the president's own team, this is not seen as a hurdle.
Global equities have rallied overnight as have US equity index futures in response. All that remains of the "debt ceiling crisis" at this point is the coming flood of Treasury bills that will be issued in short order as the federal government will move to refill coffers that had nearly run dry prior to resuming normal operations.
Release the Doves
Equity markets in the US started the month of June off with a rally on Thursday ahead of the Senate vote in response to the passage of this bill in the House of Representatives, where it was considered a tougher sell, and despite a batch of mixed macroeconomic data that were released a day ahead of May "Jobs Day." The focus now that a potential default has been avoided and fiscal policy is no longer a question mark is on the economy itself and on monetary policy.
As to monetary policy, on Wednesday both Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker signaled that they were ready to "skip" (not pause) a meeting (June 14) as a means toward slowing the aggressively hawkish policy stance of the central bank over the past 10 meetings covering almost a year and a half.
On Thursday, Harker doubled down on that messaging. Speaking at a virtual event before the National Association for American Business, Harker said, "I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target range in a timely manner." Harker added, "We should at least skip this meeting in terms of an increase" and "Disinflation is under way, but it is doing so at a disappointingly slow pace."
What really got markets going on Thursday was the release of an essay by St. Louis Fed President James Bullard at the St. Louis Fed's website. Bullard, who has been one of the most hawkish officials at the Fed, in summary wrote, "Since the FOMC has raised the policy rate aggressively during 2022 and into 2023, monetary policy is now at the low end of what is arguably sufficiently restrictive given current macroeconomic conditions." That, my friends, is the most dovish version of James Bullard that we have seen in quite some time.
On the Macro
There was both strength and weakness visible across Thursday's macroeconomic release of data points. On the labor side, where the more focused upon numbers (for May) will be released by the Bureau of Labor Statistics this morning, we saw a weekly report for initial jobless claims that printed below expectations and the Department of Labor's final revision to first quarter non-farm productivity and unit labor costs. Unit labor costs were up, but not as much as feared, while productivity was down, but not as much as feared. Though we are still left with a rising cost of employment and decreasing productivity, this was taken as a positive for the economy.
Then, we hit some trouble. The ISM Manufacturing PMI for May hit the tape in a state of contraction for a seventh consecutive month. New Orders, which is the most important component of any manufacturing-focused survey, printed at an incredibly weak 42.6 as Backlog of Orders fell all the way to an anemic 37.5. Oddly enough, Employment moved slightly further into expansionary territory, and in a most welcome shift, Prices fell from expansion in April into deeply contractionary territory in May. This helped back up what Patrick Harker has been telling us for two days, and what Fed Chair Jerome Powell told us weeks ago, that it's time for a policy "skip." Fed funds futures trading in Chicago are now pricing in a 76% probability for no rate hike when the Federal Open Market Committee meets in two weeks.
Marketplace
Equity markets at the headline level moved broadly higher on Thursday. The S&P 500 closed up 0.99%, retaking the 4,200 level that had been resistance and closing above that level for the second time in three days...
The Nasdaq Composite, which was up 1.28% on Thursday and broke out from its key resistance level in mid-May, retook and closed above the 13,000 level for the second time in three days.
Holding these highly visible levels into the weekend could be key as next week is a light week both in terms of earnings and economic data to be released. There's almost nothing significant on those calendars between Friday's close and the May CPI data to be published on June 13th, one day ahead of the next FOMC policy decision.
Nine of the 11 S&P sector SPDR ETFs shaded green on Thursday in bifurcated fashion. The four defensive sectors took places 8 through 11 on the daily performance tables as only the Utilities (XLU) and the Staples (XLP) actually lost ground. Seven sector ETFs (all growth and cyclicals) gained at least 1% for the session, led by the Communication Services (XLC) and Materials (XLB) sectors.
Breadth was solid for a nice change on Thursday as winners beat losers by a rough 5 to 2 at the New York Stock Exchange and by about 2 to 1 at the Nasdaq. Advancing volume took a commanding 73.9% share of composite NYSE-listed trade and a 68.2% share of composite Nasdaq-listed trade. The only negative takeaway from Thursday's session might be the significant drop-off in aggregate trading volume from Wednesday's action. That drop-off, though, was quite excusable, as Wednesday was the final trading day of the month. That turns today's closing prices and total volume into items of even more significance.
Total Addressable Market
According to a new report by Bloomberg Intelligence, the recent releases of consumer-focused AI (artificial intelligence) platforms such as ChatGPT and Alphabet's (GOOGL) Bard will ignite what could be a decade-long run that could see the market for generative AI reach what the report estimates at a potential $1.3 trillion in revenue by 2032. This would put the industry/sector on a projected trajectory for growth at a rate of 42% per year, which at first will be driven by a demand for AI infrastructure needed to train AI models. The report also shows the AI-assisted digital advertising business reaching $192 billion in annual revenue by 2032 and revenue from AI servers reaching approximately $134 billion.
On that note, Nvidia (NVDA) , creator of the wildly successful H100 GPU, recently highlighted a potential market-wide $10 trillion opportunity that could be catapulted by a multi-year upgrade cycle from CPU-only data center infrastructures to accelerated computing platforms needed to support far more demanding AI and other workloads. Advanced Micro Devices (AMD) will attempt to demonstrate its ability to compete at this level with the coming launch of its Instinct MI300 accelerator chip.
What Is Happening Next Week?
Apple (AAPL) . That's what's happening next week.
Strategically shoehorned into a week where there will be a dearth of earnings and/or macroeconomic data to be released, Apple will hold its Worldwide Developers Conference from Monday through Friday. The talk is that Apple is preparing to launch a virtual reality headset as well as two new Mac models that will run on Apple's own processors as it overhauls the Mac line. If that does not rattle any cages, Apple is expected to unveil updated software for the iPhone, iPad, Mac and Apple Watch lines. Both the Keynote and State of the Union Addresses will be delivered, I presume by CEO Tim Cook on Monday.
I am not going to tell anyone to sell their shares of Apple because I am long this name myself. What I am going to do, however, is warn that the chart is sending a bearish signal.
What you see above is a rising, narrowing wedge pattern. As the stock has rode atop its own 21-day exponential moving average (EMA) all year to higher prices, the lows of the pattern have been rising more quickly than have the highs, all as trading volume has slowed down slightly. Rising wedges are often seen as signals of a bearish reversal as said wedges close. This wedge appears to be closing just as Apple goes into its whole dog-and-pony show next week. Does this signal coming investor disappointment in the WWDC? I am not so bold as to make that prediction in this market. That said, if the share price does fall next week, this chart will have foretold that event.
May Employment Situation (08:30 ET)
Non-Farm Payrolls: Expecting 192K, Last 253K.
Unemployment Rate: Expecting 3.5%, Last 3.4%.
Underemployment Rate: Last 6.6%.
Participation Rate: Expecting 62.5%, Last 62.6%.
Average Hourly Earnings: Expecting 4.4% y/y, Last 4.4% y/y.
Average Weekly Hours: Expecting 34.4, last 34.4 hours.
Other Economics (All Times Eastern)
13:00 - Baker Hughes Total Rig Count (Weekly): Last 711.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 570.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
