Last Week on Wall Street

Last Week on WallStreet - April 29th, 2023

S&P 500: 0.87% DOW: -0.18% NASDAQ: 1.28% 10-YR: 3.45%

What Happened?

After stumbling out of the gates early in the week, markets had a turnaround Thursday on the back of key corporate earnings out of the mega caps to eke out slim gains. We are currently just past the halfway point in earnings season where we are seeing better-than-expected numbers. Still, the blended earnings decline stands at -3.7%. If that stands it will mark the second straight quarter in which the index has reported a decrease in earnings.

Investors are still trying to decipher earnings reports in the face of rate hike uncertainty and an oncoming economic slowdown. We will get another piece of this confounding puzzle when the Fed announces its interest rate decision next week.

Beneath the surface, mega-cap strength helped power Communications and Technology. Utilities and Healthcare were the biggest laggards.


US Economic Growth Slows to 1.1%

  • GDP rose 1.1% on an annualized basis on the back of the strongest consumer spending in nearly 2 years
  • The 3.7% increase in consumer spending reflected gains in both goods and services
  • Business investment posted the biggest drop since the start of the pandemic

The key takeaway - The economy started off 2023 on the right foot, although growth was below estimates. While the economy bounded ahead at the start of the year, helped in part by unseasonably warm weather, households and businesses pulled back on spending as the quarter progressed. Still, the latest report underscores how strong the consumer still is. The economic slowdown that is projected is expected to be more evident in the second quarter reading where forecasts call for only 0.2% growth.


Key Inflation Gauge for the Fed Rose in March: Reinforces Hike Next Week

  • Personal Consumption Expenditures price ex food and energy rose 0.3% for the month and 4.6% YoY.
  • The headline number was softer, coming in at 4.2% YoY.
    • This measure peaked out around 7% in June 2022
  • The employment cost index increased 1.2% for the first quarter, higher than the 1% estimate

The key takeaway - The PCE index is the Fed's preferred measure of inflation. This recent report, in conjunction with labor costs, strengthens the scenario of another interest rate hike next week by the Fed. Based on the CME Fed tool, markets have the probability of a 25bp hike next Wednesday near 90%. This compares to the 50% chance only a month ago.


Fed Seeks Broad Changes to Bank Rules in Aftermath of SVB Failure

  • The Federal Reserve's bank supervision chief Barr called for a reevaluation of requirements for financial firms after the failures of two major regional banks
  • The central bank will revisit the range of rules that apply to firms with more than $100B in assets including liquidity and capital requirements
  • Separately, the FDIC said it was too slow to move as risks multiplied

The key takeaway - The report was 102 pages and outlined the need for stronger standards applied to a broader set of firms. Additionally, it showed a more clear picture of how rapidly the collapse of SVB happened and how regulators were mostly aware of the banks' issues.

“Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues,” Barr said. “As a further example, limits on capital distributions or incentive compensation could be appropriate and effective in some cases.” The recommendations are likely to face fierce resistance from Republicans in Congress, as well as the banking industry.


From the Waterloo Watercooler

Fed Chair Jerome Powell was duped by Russian Tricksters Pretending to Be Zelenskyy

Britain blocked Microsoft's potential acquisition of Activision Blizzard

Netflix is doubling down on South Korea as it plans to invest $2.5B over the next 4 years to produce more Korean content.

A Japanese spacecraft crashed while attempting to land on the moon earlier this week.

Tucker Carlson and Don Lemon: A Tale of Two Sudden Cable News Exits