S&P 500: -0.80% DOW: -1.24% NASDAQ: 0.07% 10-YR: 3.45%
Last Week on WallStreet - May 6th, 2023
Fed week on Wall Street resulted in a rollercoaster experience as expected with heavy intra-day swings. Markets appear to be entering a new phase as this hiking cycle winds down transitioning from "bad news is good news" to an environment where equities follow the economic data directionally. The S&P 500 fell 4 straight days to open the week as concerning initial jobs data and Fed commentary led to investor pessimism on the economic forecast. Friday's employment report, however, showed an impressive level of resiliency in the labor market and led to a strong rebound to close the week.
Beneath the surface, mega-cap names continue to fuel much of the index-level performance. Only 3 sectors finished the week positive by holding onto marginal gains. Technology (0.3%) led all sectors. The rest of the S&P secured losses to end the week with Energy (5.8%) and Communications (2.6%) suffering the most.
Fed Makes 10th Rate Increase and Opens Door to Pause
- The Federal Reserve raised interest rates by a quarter-point at Wednesday's meeting bringing the policy rate to 5-5.25 percent
- Their statement announcing the decision tempered language on future hikes saying they "may" be appropriate
- Powell was clear, however, that a decision on pausing interest rates has not been made yet and incoming data will drive that choice
- When asked about cutting rates later this year, Powell responded by saying lowering the policy rate was not in their forecast
The key takeaway - The Federal Reserve is facing a trilemma as they face well above-target inflation, an economy showing signs of stagnation, and a banking sector that is under stress after the collapse of 3 large regional banks. Powell and the committee have made a distinct step in this hiking cycle by saying they are open to the possibility of stopping the previously inevitable and largely unchallenged hiking at each meeting. Even if they pause, it's impossible to predict how the last 12-plus months of hiking will impact the economy in the coming months and what, if anything, could break in the process.
Job Growth Totals 253,000 in April, Beating Expectations Even as the US Economy Slows
- Nonfarm payrolls increased 253,000 for April, beating Wall Street estimates for growth of 180,000
- The unemployment rate was 3.4% against an estimate for 3.6% and tied for the lowest level since 1969
- Average hourly earnings rose 0.5% for the month and increased 4.4% from a year ago, both higher than expected
- The labor force participation rate was unchanged at 62.6%
The key takeaway - The April jobs number came in much hotter than expected and pushes back against the data of the last few months indicating a slowing economy. The employment economy remains strong, according to data from the report, but continues to run hot as it matched the lowest unemployment rate in 50 years. This heat is flowing through to wage growth, which also surprised to the upside and exacerbates concerns around inflation. The Fed could take this to mean they have further to go and throw out ideas of a pause at the next meeting.
Businesses Grow a Bit Faster, ISM Finds. Economy Still in OK Shape
- The ISM Services Index rose to 51.9% in April, indicating modest growth in service-oriented businesses
- The ISM Manufacturing Index slightly rose to 47.1%, but still remains deep in contraction territory
- New orders, an indication of future demand, rose strongly for service businesses
- Prices paid for inputs remained flat
The key takeaway - Higher interest rates and stubbornly rising prices have pushed consumers away from purchasing larger goods evidenced by the continued struggles for manufacturing businesses. However, service-oriented businesses have kept their heads above water by eking out marginal growth over the past several months. While the numbers aren't screaming that a recession is around the corner, they do express a stagnation of sorts in the growth of the economy.
From the Waterloo Watercooler
The Federal Trade Commission has proposed banning the Facebook parent from making money off of kids’ data
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Eli Lilly reported that its Alzheimer’s drug slowed the disease’s progression by 35% in late-stage trials
The Rock & Roll Hall of Fame named its newest inductees, including Willie Nelson, Missy Elliott, Kate Bush, and others.