Stock Market Dips Ahead of Debt Battle After Busy Week (Weekly Cheat Sheet)

Last week in the stock market saw several noteworthy events but left most investors with more questions than answers. The Federal Reserve implemented what could potentially be the last interest-rate increase of the current hiking cycle on May 3.

The Fed raised rates by 0.25%, marking the 10th consecutive rate hike since March 2022, bringing the Fed funds rate to 5.0% – 5.25%.

The week concluded with a minor decline in the S&P 500, while the Nasdaq Composite recorded a marginal increase. Even though the S&P 500 received substantial relative support at the 4,100 level, the index-level price activity was somewhat misleading due to underlying selling pressure.

The broader market was propped up by mega-cap stocks, which benefited from some safety-driven purchases.

What Happened Last Week

The Vanguard Mega Cap Growth ETF (MGK) rose by 0.8% last week, while the Invesco S&P 500 Equal Weight ETF (RSP) dropped by 1.1%. Alphabet (GOOG) significantly bolstered the market with an 11.0% surge this week following its Developers Conference on Wednesday.

Market observers began the week by scrutinizing the outcomes of April’s Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS). To sum it up, the SLOOS confirmed market expectations following the local banking crisis that began in mid-March.

Banks are projecting a continued tightening of lending standards across all loan categories for 2023. Despite initial volatility post-release, the major indices closed essentially where they were before the SLOOS announcement.

Bank stock PacWest (PACW) underperformed, plunging another 21.0% this week after disclosing a roughly 9.5% reduction in its deposits for the week ending May 5. PACW also slashed its dividend from $0.25 to $0.01 per share. The SPDR Regional Banking ETF (KRE) saw a 5.2% decline in value.

Tensions were high in the broader market after Treasury Secretary Yellen warned of “economic chaos” if the debt ceiling was not increased. A meeting between President Biden and congressional leaders last Tuesday did little to alleviate market concerns.

There were no signs of progress toward an agreement. President Biden’s planned Friday meeting with congressional leaders has been postponed to early next week as negotiations continue.

I don’t think the US will default for several reasons, even though there has to be a point to stop the spending. The primary reason is that Republican leadership doesn’t want to be blamed for a default. Biden knows this and it will likely lead to a deal in which Biden keeps most of his programs.

The market reacted to the latest inflation measures in the April Consumer and Producer Price Indices. These reports primarily mirrored market expectations, suggesting that the Fed might consider maintaining its policy rate in its June meeting, given the ongoing moderation in month-over-month inflation.

On Friday, the preliminary findings of the University of Michigan Consumer Sentiment Survey for May were released. They indicated a dip in sentiment and a rise in five-year inflation expectations, from 3.0% to 3.2%, the highest level since 2011. Similarly, the NY Fed’s Survey of Consumer Expectations for April showed a slight uptick in inflation expectations for the next three and five years.

In other news, Disney’s (DIS) fiscal Q2 results, released on Thursday, dampened sentiment by revealing a 2% year-over-year decrease in Disney+ paid subscribers.

CALENDAR & MOVERS

  • Tuesday, May 16 – Retail Sales (MoM) (April)
  • Thursday: Existing Home Sales (April)
  • Fed Talk
  • Debt Ceiling Battle
  • Retail Earnings

Federal Speakers

Investors will be closely observing the statements made this week by a number of Federal Reserve officials who have scheduled speaking engagements. Michael Barr, vice chair of the Federal Reserve, will testify before Congress about the recent turmoil in the banking industry and answer queries about the central bank’s response to the situation. Investors’ perspectives on the direction of rate policy may be significantly influenced by the Fedspeak as a whole this week.

Debt Battle

As congressional leaders and President Biden try to negotiate a deal, concerns about the United States going into default on its debt keep growing. Only two weeks remain before the alleged “deadline” of June 1 that U.S. Treasury Secretary Janet Yellen initially reported. The market will become more volatile as time goes on, which will result in a bad situation for many investors. Tuesday is the date of the next meeting between President Biden and House Speaker McCarthy.

Retail Earnings

This week, the first quarter earnings of retail heavyweights Walmart (WMT) and Home Depot (HD) will be reported, continuing the earnings season. Investors will be paying close attention to retail earnings this season to better understand how inventory levels are doing and how much demand there is for products going into the summer.

Dividends

I’ve noticed that several companies are expected to increase their quarterly payouts, which should cause a bump in their stock prices. These include Northrop Gruman (NOC), Lennox International (LII), Advanced Drainage (WMS), and LCI Industries (LCII)

BONDS

In a week replete with data, particularly regarding U.S. inflation, the markets saw only minor shifts. Both Consumer Price Index (CPI) and Producer Price Index (PPI) met expectations, and even though they’ve slightly declined, inflation is still considerably above the Federal Reserve’s 2% target. However, the consensus amongst investors seems to be an expectation of no changes to the current monetary policy. The yield on the U.S. 10-year treasury note remains entrenched within the slim 3.31/3.64% range, a factor that could potentially animate the currently subdued market.

COMMODITIES

Oil & Energy

Oil prices experienced a period of stabilization this week, demonstrating difficulty in reclaiming lost ground. The firmness of the U.S. dollar, apprehensions surrounding the U.S. debt ceiling, problems faced by U.S. regional banks, and uncertainties about the Chinese economic recovery have all contributed to investors’ reduced interest in risky assets, including oil. In other developments, OPEC preserved its global oil demand growth prediction in its most recent monthly report. The cartel, as usual, exercised caution in its forecasts, pointing to various uncertainties that might necessitate production adjustments. As for prices, North Sea Brent is trading around $75 per barrel, compared to $71 for U.S. crude oil (WTI).

Precious Metals & Gold

The mood is rather dismal in the metals market. Base metal prices continued their downward trend this week, with copper at its lowest level of the year, trading at $8260 per ton on the London Metal Exchange. The recent Chinese economic data, which doesn’t indicate a significant rise in the country’s industrial production, has dampened the enthusiasm of traders, leading to a decline in interest in industrial metals. The fervor for gold has also cooled off, with prices hovering near $2,000 per ounce.

CRYPTOCURRENCY

This week witnessed a lull in Bitcoin’s performance, with the cryptocurrency losing 7% of its value and currently hovering around $26,500. Ether, the second-largest cryptocurrency by market capitalization, has fared slightly better, declining by 5% since Monday. Crypto investors appear to be on standby, awaiting positive catalysts within the digital asset market, and an overall improvement in economic conditions that could potentially drive capital towards riskier assets.

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