Opening Market Update: Running Hot?

(Friday market open) We're getting close to the so-called "X-date" of June 1 when the government might run out of funds to pay its bills. The general idea on Wall Street is that a deal will be made to avoid default. Progress was made between congressional leaders and President Joe Biden on Thursday, a report from Reuters said, with stakeholders needing to agree on just $70 billion in spending. Any deal would still need to get through Congress, of course.

Many may look to get a jumpstart on the long holiday weekend, perhaps leading to a more thinly traded market this afternoon. Those still engaged with their screens may consider reducing their trading sizes amid the debt ceiling uncertainty and other risk factors, as a thin market can set the stage for volatile market swings. 

The main economic news this morning is on the inflation front. April Personal Consumption Expenditures (PCE) prices rose 0.4%, a little hotter than the 0.3% analysts had expected. Core PCE prices, which strip out food and energy, also rose 0.4%. Major stock indexes and bonds fell slightly after the numbers posted an hour before the open.

• The 10-year Treasury note yield (TNX) fell 2 basis points to 3.79% earlier in the morning but jumped to 3.83% after the PCE data.
• The U.S. Dollar Index ($DXY) slipped to 103.91.
• The Cboe Volatility Index^® (VIX) futures are lower at 18.76.
• WTI Crude Oil (/CL) rose slightly to $72.48 per barrel.

The PCE prices report, which is closely watched by the Federal Reserve, could indicate that inflation remains stubbornly hotter than expectations, possibly fueling renewed concerns over additional rate hikes in the coming Federal Open Market Committee (FOMC) meetings. Core PCE is now up 4.7% year-over-year. It's been 0.3% or higher month over month in each of the first four months of 2023, with no real sign of a decline in growth.

There's also little sign of slowdown in another data point out this morning, as April Personal Spending rose 0.8% versus expectations on Wall Street for 0.4%. This could reflect higher prices for goods and services, but also doesn't suggest the consumer is pulling back. That's a bit puzzling considering so many retailers reporting recently say consumers are cautious and avoiding discretionary purchases.

Yesterday was honorary "chip day" on Wall Street as the PHLX semiconductor index (SOX) enjoyed its strongest single day since February after Nvidia (NVDA) earnings stirred excitement over artificial intelligence (AI). Nvidia's market capitalization is now approaching $1 trillion. That's territory previously attained only by a handful of stocks, including Microsoft (MSFT), Apple (AAPL), and Alphabet (GOOGL).

Nvidia expects $11 billion in sales this current quarter, compared with analysts' previous estimates for $7.2 billion, according to Bloomberg. The excitement over Nvidia spilled into rival chipmaker Advanced Micro Devices (AMD) and in chip supply company stocks as well. The SOX is now up an astonishing 60% since last October's low. That compares to just a 19% rise since then for the S&P 500^® index (SPX).

Speaking of which, the SPX had a nice rebound late Wednesday and Thursday after scraping near the 50-day moving average at Wednesday's low point. The 50-day moving average now rests just below 4,100, and that could be a zone to check for possible support on any sell-off driven by the debt ceiling uncertainty ahead of the holiday weekend. The close above old resistance at 4,150 on Thursday might generate some technical support.

With 96% of S&P 500 results in, average earnings per share (EPS) and revenue growth were both well above expectations. Additionally, the amount of the average "beat" was better than any of the last four quarters. Which suggests analysts may have placed the bar too low on earnings expectations heading into the Q1 earnings season.

The question is whether that also might hold true for current Q2 earnings estimates, though how the debt ceiling debate plays out could affect the roughly one-third of the quarter that remains.

As for the chip sector, it's tempting to jump in when there's a rally like this, but as with any trade, investors may want to make sure they truly understand the semiconductor business and its risks before buying any shares. A 60% rise since October means current valuations are somewhat elevated, another risk factor to consider.

Chances of a Fed pause at the June meeting stand at 59% as of this morning, according to the CME FedWatch tool. That's slightly lower than yesterday, but we'll see how the market responds to this morning's PCE inflation data. About 10 minutes after the data came out, the tool still indicated a 58% probability of a pause.

Consumer check: Soon after today's open we'll get a look at the final University of Michigan Consumer Sentiment figure for May. Analysts expect it to remain as soft as it was earlier this month, with consensus at 57.8 for a headline figure, according to Briefing.com. Weak sentiment often plays into lower consumer spending—a negative factor for the economy. Keep an eye on one-year inflation expectations, which dipped to 4.5% in early May from 4.6% in April.

Looking ahead: After Monday's holiday, a couple of data points stand out next week, none more critical than next Friday's May Nonfarm Payrolls report. Before that, however, will be the release on Thursday of the May ISM Manufacturing Index, a report that has shown production levels struggling for months. In fact, it's been in contraction territory below 50 for a headline figure going back to last October without a break. Flash Manufacturing PMI data earlier this week from S&P Global was tepid, falling to a headline level of 48.5 in May from 50.2 in April. Growth was constrained by lack of new orders, S&P Global said. One interesting piece of the puzzle was employment in manufacturing, which grew as firms had better luck finding qualified candidates. The inflation picture also appeared to improve for manufacturers. Light at the end of the tunnel?

Hiring manager: Another major data release next week is the April Job Openings and Labor Turnover Survey (JOLTS) report for May, due out Wednesday morning after the market opens. In a booming labor market, this one's been a bit of an outlier lately, showing openings trending lower for several months. They're still historically high, however, reaching 9.59 million in March, up about 50% from typical prepandemic levels.

One-sided: Yesterday's Wall Street rally still saw declining stocks outnumber advancing ones by about a 2 to 1 margin. The tech sector climbed more than 4% while no other sector gained as much as 1%. Investors appear to be embracing big-tech stocks and little else as debt ceiling jitters continue.

Debt ceiling primer: A default doesn't seem likely, but volatility may rise because of investor anxiety over the debate in Washington, D.C. Check here for Schwab's latest answers to your debt ceiling questions.

Ideas to mull as you trade or invest

Debt perspective: Fitch Ratings drew headlines yesterday when it put on negative watch the U.S. AAA long-term foreign-currency issuer default rating. It's not the first time ratings agencies have raised concerns about U.S. credit. In 2011, S&P Global Ratings downgraded its long-term credit ratings for the U.S. from AAA to AA+ after an extended U.S. debt ceiling fight. What did that end up meaning for the markets? From a borrowing cost standpoint, not much. The benchmark 10-year Treasury note yield right before the August 2011 rating cut by S&P was 2.95%. By the end of that year, the 10-year yield was back below 2% after some volatile trading that fall. That debt ceiling crisis, however, concluded with compromise and plans to cut $2 trillion in future federal spending. No one knows how the current one will play out.

Recession watch: It's hard to get all that excited about a slight upward adjustment in the government's estimate for Q1 Gross Domestic Product (GDP) growth, as a jump to 1.3% from the previous 1.1% still represents relatively anemic growth and the lowest since Q2 of last year. This weakness, ironically, accompanies a historically strong jobs market where unemployment sits at historic lows below 3.5%. Still, almost every large U.S. retailer reporting earnings the last two weeks says consumers are cautious and shying away from large discretionary purchases. Could this mean there's a "stealth" recession already in place? Economists usually see recessions once they're at least partly in the rear-view mirror. Keep an eye on next week's May ISM Manufacturing Index for more clues. It's been soft for months. Another recession clue is the Fed's Beige Book release next Wednesday, which delivers ground-level observations of economic activity from regional Fed economists.

Weekend prep: The broader markets won't be open for trading until Monday evening. Overnight trading tends to feature thinner volume than the daytime sessions and may see more dramatic moves late Monday ahead of Tuesday's opening bell. Anyone participating in the market should pay attention to what happens Monday evening but understand that heavier volume once Tuesday's session begins might mean less dramatic swings.

May 29: Memorial Day – markets closed.

May 30: May Consumer Confidence.

May 31: May Chicago Purchasing Managers' Index, April Job Openings and Labor Turnover Survey (JOLTS), and expected earnings from Advance Auto Parts (AAP).

June 1: May ISM Manufacturing Index, April Construction Spending, expected earnings from Dollar General (DG) and Hormel Foods (HRL).

June 2: May Nonfarm Payrolls.