"Breadth did not turn green until late in the day and, at that, net breadth on the New York Stock Exchange was +530, which is simply pathetic for a day the S&P 500 was up 40 points. Yesterday (Wednesday), the S&P was up 48 points with net breath at +1,640."
- Helene Meisler (Thursday evening)
More Optimism
If the avoidance of default is not fully priced in at this point, it sure is starting to feel like it. President Biden had agreed to negotiate directly with House Speaker Kevin McCarthy if need be. McCarthy, for his part, said on Thursday that staff negotiators could come to an agreement in principle to raise or suspend the debt ceiling as soon as this weekend. McCarthy also noted that the House would need to vote on such an agreement by next week.
Senate Majority Leader Chuck Schumer pledged that the Senate would take up any legislation that passes in the House and alerted senators that they may need to be in DC during next week's recess.
The peanut gallery was active as well. Texas Republican Kay Granger, who chairs the House Appropriations Committee, implied that a deal was "close" as Democrat Steny Hoyer of Maryland said, "I think we are going to get a deal."
Bloomberg News is reporting that in a roughly 20-minute phone call between President Biden (from Japan) and his team of negotiators on Friday morning that steady progress was being made.
The Hawk (excerpt)
"And from dense cloud to noontide glow,
(His fiery gaze still fixed below),
He sails on pinions proud and slow!
Till, like a fierce, embodied ray,
He hurtles down the dazzling day,--
A death-flash on his startled prey;
And where but now a nest was found,
Voiceful, beside its grassy mound,
A few brown feathers strew the ground!"
- Paul Hamilton Hayne (1857?)
About That Pause...
On Thursday morning, Dallas Fed President Lorie Logan, who does vote on policy this year, spoke publicly and released her inner hawk. Logan said, "After raising the target range for the federal funds rate at each of the past 10 FOMC meetings, we made some progress. The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren't there yet."
Logan was not alone in musing hawkishly on Thursday.
Fed Governor Philip Jefferson, who is a potential replacement for Lael Brainard as vice chairman of the central bank, flatly stated.. "History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates."That wasn't too bad. Jefferson is influential, but there was one more key speaker to go.
St. Louis Fed President James Bullard may not vote this year (he certainly did in 2022), but outside of Cleveland's Loretta Mester he probably has been the Fed's leading hawk, especially among officials who have been in their positions since the tightening cycle began. On Thursday, Bullard said he would go into the June 14 meeting with an "open mind."
Bullard then got down to business in an interview with the Financial Times: "I do expect disinflation, but it's been slower than I would have liked, and it may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control." Bullard then put the cherry on top: "Our main risk is that inflation doesn't go down or even turns around and goes higher, as it did in the 1970s."
Movement
Treasury yields moved higher on Thursday. The US 10-Year Note paid us much as 3.65% (+9 basis points), while the US Two-Year Note gave up 4.27% (+11 basis points) at its Thursday lows. This happened as the mosaic that is the fed funds futures table of probabilities being priced in has changed dramatically. The likelihood, according to these markets, that the Federal Open Market Committee (FOMC) stands pat on June 14 is now down to 63%, with a 37% probability for a 25-basis-point rate hike that day.
Futures markets still see the current range (5% to 5.25%) as the terminal rate, though far less assuredly. The first rate cut has now been pushed out to Nov. 1 from Sept. 20 earlier this week. The fed funds rate is now seen at 4.5% to 4.75% at year's end and at 3% to 3.25% in 18 months. Both of these ranges are now 25 basis points higher than they were a few days ago.
Readers are reminded that there are three Fed speakers on my radar this morning, the last of whom will be the big dog himself, Fed Chairman Jerome Powell. He is due to participate at 11:00 ET in a panel discussion in DC titled, "Perspectives on Monetary Policy," so buckle your chin straps.
Equities
What a day. So much green at the index level. Fairly well split at the individual security level. The S&P 500 added 0.94% on Thursday as the Nasdaq Composite tacked on 1.51%. The Nasdaq 100 ran 1.81% and closed well above those levels from August 2022 that we talked about yesterday. The Nasdaq 100 closed at 13-month highs on Thursday.
There has been a lot of talk of late about a bifurcated market, with a steep divide between growth and value. On Thursday, equity markets were trifurcated. Seven of the 11 S&P sector SPDR ETFs shaded green on Thursday. The two growthy sectors led the way, with Technology (XLK) and Communication Services (XLC) up 2.05% and 1.8%, respectively. The next five winners were all cyclical in nature, sporting gains of 0.59% to 1.55%. Then there were the bottom four. All four defensive sectors closed in the red on Thursday, with the Staples (XLP) and the REITs (XLRE) at the absolute bottom.
Across growth, the Philadelphia Semiconductor Index gained 3.16%, led by Nvidia (NVDA) , Lam Research (LRCX) , Micron (MU) and Advanced Micro Devices (AMD) . All four of those names gained more than 4% for the session.
Beyond the semis, the Dow Jones US Software Index ran 1.95% as the Dow Jones US Internet Index popped for 1.69%. That group was led by Stocks Under $10 portfolio holding Palantir Technologies (PLTR) , Take-Two Interactive (TTWO) and Netflix (NFLX) . Those three stocks respectively soared to one-day gains of 14.54%, 11.69% and 9.22%.
As for breadth, as mentioned by Helene at the top, it was not quite what one would expect for a rally-sustaining session such as what was experienced on Thursday. Winners beat losers by a rough 3 to 2 at the New York Stock Exchange and by just 10 to 9 at the Nasdaq. Advancing volume still took a majority share of Thursday's trade (56.8% for NYSE listings, 59% for Nasdaq listings), but fell well off of Wednesday's levels. Trading volume stalled as well. Measured on a day-over-day basis, volume decreased slightly for NYSE names and increased slightly for Nasdaq names. In short, markets await a debt ceiling deal in the coming days as well as the Fed chairman later this morning.
Found Money
Due to an accounting error, the Pentagon apparently has over-counted by at least $3 billion the value of weaponry sent as military aid to Ukraine. This potentially eliminates the need for the White House to ask our legislators for more funds intended for that purpose later this spring/summer. What the Pentagon did was price older weapons sent out of stock to Kiev's defense not by their actual value but by what it would cost to replace these weapons with their modernized descendants. The Department of Defense still has $2.7 billion of capital to spend on Ukraine in its coffers currently in addition to this "found" $3 billion-plus that appears to have been found almost two months ago.
While we are talking about defense, The US Air Force on Thursday issued a request for proposals for the full-scale developmental phase for a Next Generation Air Dominance manned fighter aircraft (NGAD). The new aircraft would replace Lockheed Martin's (LMT) F-22 Raptor and would be intended to fly in tandem with a team of drones that are being developed in a completely different program. The idea would be to award a contract for development in 2024 and to put new fighters into active service in the 2030s. This is going to be a whopper, gang. The top competitors are expected to be Lockheed, Boeing (BA) and Northrop Grumman (NOC) . On that note, CNN is reporting that the Biden administration has been signaling to allies in recent weeks that it would permit the export of F-16 Falcon (Lockheed) fighter aircraft to Ukraine, but so far has been reluctant to export any such aircraft from US stocks.
Economics (All Times Eastern)
13:00 - Baker Hughes Total Rig Count (Weekly): Last 731.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 586.
The Fed (All Times Eastern)
08:45 - Speaker: New York Fed Pres. John Williams.
09:00 - Speaker: Reserve Board Gov. Michele Bowman.
11:00 - Speaker: Federal Reserve Chair Jerome Powell.
Today's Earnings Highlights (Consensus EPS Expectations)
