Markets Blog
David Matzko, LPL Research
It was a choppy week of price action for stocks as the broader market finished near breakeven. Large cap tech broke away from the rest of the pack following stellar earnings from NVIDIA (NVDA), the posterchild of the artificial intelligence (AI) boom. Commentary from several Federal Reserve (Fed) members and the May Fed minutes leaned hawkish this week, pushing interest rates moderately higher and rate cut expectations further out on the calendar. Most commodities, including oil, pulled back on the prospect of higher-for-longer monetary policy and concerns over sustainable demand from China. A downtick in consumer inflation expectations in today’s University of Michigan report helped assuage entrenched inflation fears.
Index Performance
U.S. and International Equities
U.S. Equities: U.S. equities had a bit of a bumpy ride this week, but at least in the case of the S&P 500, ended up about where they started. It was a better week for the Nasdaq Composite, which gained more than 1% to end at a new all-time high on the back of strength in the technology sector. Of course, much of that technology strength can be attributed to well-received earnings from chip giant NVDA. Weakness in the rest of the market was attributable, at least in part, to the uptick in interest rates after some hawkish Fedspeak and suggestions in the minutes from the May FOMC meeting that a rate hike could be put back on the table (not LPL Research’s expectations). The Dow lagged on weakness in Home Depot (HD), Intel (INTC), and McDonald’s (MCD).
Within the equity markets, strong gains in the technology sector, powered by a more than 13% gain in NVDA shares, carried growth to another strong week relative to value, while rate jitters weighed on small caps as the Russell 2000 Index lagged and energy lagged on lower oil and gas prices.
International Equities: It was a challenging week for Asian markets as the dollar rose and rate jitters returned to the U.S., spilling overseas. The Hang Seng and mainland China equities were hit particularly hard amid concerns that property market measures may not go far enough and weakness in the auto sector. Geopolitical concerns continue to linger as well. Primary developed international markets in Europe and Japan finished the week slightly lower, not far behind the U.S.
Fixed Income: The Bloomberg Aggregate Bond Index was slightly lower on the week following a heavy dose of Fed officials that downplayed the prospects of imminent rate cuts. Market pricing for rate cuts continues to be volatile and now markets don’t expect the first cut to come until December. Treasury yields were higher across the yield curve, with the 2-year yield higher by over 0.10%. The week ahead is a holiday-shortened one, but markets will be paying attention to the Fed’s preferred inflation gauge as well as the Treasury Department’s $183 billion of 2-year, 5-year and 7-year Treasury auctions.
Despite a higher for longer interest rate environment, corporate credit issuance has remained at a torrid pace. According to league tables, over $1.5 trillion in U.S. corporate debt has been issued this year, with nearly $800 billion coming from investment grade companies (IG) and the remainder from high yield (HY) issuers. A considerable $280 billion of bonds/loans have been refinanced so far this year, following $334 billion in 2023, a 15-year low $132 billion in 2022, and a record $512 billion in 2021. Notably, a mere $30 billion of HY bonds and loans mature this year with refinancing risks pushed out to 2028 (bank loans) and 2029 (HY bonds).
Historically, tight lending standards and tight financial conditions have been a headwind to high yield bond prices, but with the primary market seemingly wide open, issuers have had no trouble refinancing debt to push maturities out. The extended runway for borrowers has taken a risk off the table, particularly for high yield borrowers.
We’re neutral on HY and negative on IG, but the environment broadly remains supportive for credit risk. Growth should slow but not collapse, which is typically good for credit. But credit is not cheap.
Commodities: The broader commodities complex traded lower this week, with notable weakness in energy and metals. The Bloomberg Commodity Index slid around 0.5% after struggling with short-term overbought conditions and resistance near the 2023 highs (108). Despite the modest pullback, the technical setup remains constructive as BCOM continues to climb out of a bottom. Longer-term momentum has improved following the recent downtrend reversal, evidenced by a golden crossover between the 50- and 200-day moving average (dma) last week.
Rising real yields and an advance in the dollar further weighed on commodities this week. The U.S. Dollar Index followed yields higher after bouncing off support from its rising 200-dma. The greenback will need to clear resistance near 105 (prior highs/50-dma) before a retest of the April highs can be considered.
Metals faced widespread selling pressure and underperformed. Copper fell 5.5% and snapped an eight-week winning streak. Overbought conditions coupled with concerns over Chinese demand dragged down the industrial metal back near support from the 2021–22 highs. Platinum dropped over 5% and underperformed within precious metals. Gold declined over 3% but held above its rising 50-dma.
Energy commodities traded broadly lower. West Texas Intermediate (WTI) slid around 3% despite a 1.3% relief rally on Friday. Risk for higher-for-longer monetary policy due to better-than-expected economic data and a surprise weekly inventory build weighed on oil. Technically, WTI has violated support off the lower end of a rising price channel and is back below the declining 200-dma. Natural gas pulled back from overbought levels as forecasts called for reduced heating demand.
Widespread buying pressure lifted the agricultural space this week. Cocoa jumped over 11% as dip buyers stepped back into an oversold market. Wheat rallied 8% and continued to climb out of nearly a year-long bottom. Supply disruptions in Russia and France have provided a tailwind to the market.
Economic Weekly Roundup
Fed minutes create some rate jitters. Before investors get too enamored with the minutes from May 1, they should remember that the minutes were for a meeting before the encouraging April CPI release. Some members of the committee noted that the economy is less interest rate sensitive than in previous cycles, something we’ve written about. Markets could get nervous about committee members willing to entertain tighter policy but remember, the committee did not have April CPI data yet. Bottom Line, although inflation in April eased a bit, Fed officials need more confirmation that the trajectory is favorable for their two percent target. In general, the committee believes policy is restrictive and so the next move for the Fed will likely be a cut later this year.
Inflation expectations better than originally estimated. After further review, the consumer is not as pessimistic about the inflation trajectory. The University of Michigan (UofM) consumer sentiment survey had initially reported one-year inflation expectations rose to 3.5%, but the full sample suggested short-term inflation expectations were 3.3% – still too high but not as hot as originally reported. Consumers have greater uncertainty about future buying plans of big-ticket items, placing some risk to spending this summer. Overall sentiment was revised higher from the initial estimate but was still at its lowest level since November last year.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Markets Closed (Memorial Day Holiday)
Tuesday: Conference Board Consumer Confidence & Expectations
Wednesday: Federal Reserve Beige Book
Thursday: First Quarter GDP (2nd release); Personal Consumption
Friday: Personal Income and Spending; PCE Deflator
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