Last Week on Wall Street

Last Week on WallStreet - May 27th, 2023

S&P 500: 0.32% DOW: -1.00% NASDAQ: 2.48% 10-YR: 3.81%

What Happened?

After a week of swirling headlines from Washington surrounding the debt-ceiling negotiations, investors enter the weekend with no deal written in ink. Optimistic news flowing from the most recent round of meetings drove a stock market rally Friday as investors expect default to be avoided. Elsewhere, Technology names recorded another week of intense outperformance after chip maker Nvidia reported impressive earnings and AI-powered forward guidance. Seemly every company associated with the artificial intelligence boom flew higher and Nvidia itself added nearly $200 billion to its value in one day of trading.

Beneath the surface, significant divergence was observed among sectors of the S&P 500 this week. Although the index ended slightly higher, only three sectors managed to post gains. The remarkable rally in the Technology (4.6%) sector played a crucial role in this divergence, ignited by Nvidia's report. Conversely, other areas of the equity market experienced a downturn, with defensive sectors such as Staples (3.3%) and Healthcare (2.9%) facing sharp declines.


Inflation Rose 0.4% in April and 4.7% From a Year Ago, According to Key Gauge for the Fed

  • The personal consumption expenditures price index rose 0.4% for the month excluding food and energy costs, higher than the 0.3% Dow Jones estimate
  • On an annual basis, the gauge increased 4.7%, 0.1 percentage point higher than expected
  • Including food and energy, headline PCE also rose 0.4% and was up 4.4% from a year ago
  • On an annual basis, goods prices increased 2.1% and services rose by 5.5%

The key takeaway - April's PCE report adds fuel to the confusion market participants have encountered in their attempts to forecast the Federal Reserve's path for interest rates. For several weeks, markets practically reached consensus that May's hike would be the last for this tightening cycle. Economic data has brought that consensus into question dramatically as jobs reports, consumer spending data, and this inflation reading have convinced markets to reassess their forecasts. After this report was released, the odds of a Fed hike in June jumped to 56% as priced in asset values. The question now becomes will it be the hawks or the doves ultimately win out at the next FOMC meeting?


US Economy Grew Faster in May, S&P Finds. Recession Still Appears Far Off

  • The S&P Flash U.S. services-sector index rose to a 13-month high of 55.1 in May from 53.6 in the prior month
  • The S&P Global U.S. manufacturing sector index slipped to 51 from 52.4, though it was still higher than expected
  • Any number above 50 points to expansion. Figures below that signal contraction
  • New orders, a sign of demand, rose at service companies at the fastest pace since April 2022 while high demand added to inflationary pressures

The key takeaway - Throughout 2023, the economy has demonstrated a notable degree of resilience, surpassing initial expectations. Although the initial bar was set quite low, the services sector has consistently made progress, propelled by robust consumer spending. While the manufacturing sector is treading water, its contribution has been enough to enable the expansive services sector to propel the economy toward growth. Most experts still expect a recession in the next year or so given deteriorating fundamentals, but this forecast has been repeatedly pushed back by stronger growth. Unfortunately, this growth could support stubbornly elevated inflation.


Fed Officials Less Confident on the Need for More Rate Hikes, Minutes Show

  • Federal Reserve officials were divided at their last meeting over where to go with interest rates
  • Some members see the need for more increases to combat inflation while others expect a slowdown in growth to remove the need to tighten further
  • Though the decision to increase the Fed’s policy rate by 0.25% was unanimous, the meeting summary reflected disagreement over what the next move should be, with a tilt toward less aggressive policy

The key takeaway - The recent FOMC meeting revealed a notable change in the language used by the Fed regarding future interest rates. Previously, there was an expectation of an impending rate hike at each meeting, but now the Fed has adopted a more "data-dependent" approach. The minutes shed light on the differing opinions among Fed members regarding the appropriate course of action in response to inflation. Some members believe that the Fed has already taken sufficient measures, while others argue for further action to curb inflation. Over the past two weeks, market sentiment regarding this decision has undergone a significant shift. Initially, the probability of a rate hike per market pricing was negligible, but with the emergence of new economic data, the odds have now reached approximately 50/50.


From the Waterloo Watercooler

In a long-awaited move, Netflix announced that it’s cracking down on password sharing in the US by charging $7.99/month to add another user outside your home

Peloton, in a new marketing campaign, is trying to rebrand itself as a fitness company for everyone rather than a fancy in-home bikemaker.

Meta slapped with $1.3 billion fine over Facebook's sending of European user data to the United States.

The US esports industry is hurting, with viewership down 32% from 2021 and organizations selling their teams