Last Week in Review – May 15, 2023 – from Stephen Colavito
Stocks recorded solid gains last week, with the S&P 500 Index breaching the 4,200 level in intraday trading for the first time since late August. The index has remained notably range-bound over the past few months, and traders observed that the previous week marked the sixth consecutive one in which it failed to move by more than 1%—the longest stretch since November 2019. The market’s advance remained notably narrow as well, however. The equally weighted S&P 500 Index (SPEXW) lagged by 77 basis points (0.77%) and ended the week up only 0.93% for the year to date, 825 basis points behind the weighted index.
The disparity was reflected in the outperformance of several mega-cap technology-related stocks, particularly a strong gain in the shares of Google parent Alphabet and Facebook parent Meta Platforms. NVIDIA, Advanced Micro Devices (AMD), and several other chipmakers also recorded solid gains. Regional bank shares also rallied and recouped some of their recent losses, with a regional bank exchange-traded fund (ETF) recording its best daily increase since early 2021 on Wednesday. The typically defensive consumer staples, health care, and utilities sectors lagged.
The catalyst for the week’s gains appeared to be a notable shift in tone around debt ceiling negotiations. Following a Wednesday meeting at the White House, President Joe Biden stated he was confident there would be no default. At the same time, Republican House Speaker Kevin McCarthy called a deal “doable,” and Democratic Senate Leader Chuck Schumer stated that the only path forward was via a bipartisan agreement. President Biden traveled to Japan for a meeting of G-7 leaders, but the White House announced that he would cut his trip short and return on Sunday to continue negotiations. However, stocks seemed to waver a bit on Friday after Republican negotiators announced that they had decided to “press pause” in discussions.
US - MARKETS & ECONOMY
Much of the week’s economic data generally aligned with consensus expectations, but investors appeared to react to some prominent surprises. Retail sales rose 0.4% in April, below consensus expectations, and at the slowest year-over-year pace (1.6%) since early in the pandemic. Given that the data are reported on a nominal basis and that the consumer price index rose 5.5% over the same period, inflation-adjusted spending fell sharply. Industrial production rose 0.5% in April, well above expectations for a flat reading, driven partly by increased auto manufacturing.
Last week also brought signs of surprising resilience in the labor market. Weekly jobless claims came in at 242,000, below expectations and below the previous week’s reading of 264,000, the highest level since late 2021. Continuing claims hit their lowest level in nine weeks.
Given the Federal Reserve’s stated intention of cooling the labor market to bring down inflation, investors were perhaps primed to react negatively to some hawkish commentary from Fed Chair Jerome Powell on Friday. An early rally evaporated after Powell stressed before a Fed conference that inflation remained too high and that officials were resolute about returning it to their target of 2%. Nevertheless, Powell also stated that tightening credit conditions following recent banking turmoil meant that the “policy rate may not need to rise as much as it would have otherwise to achieve our goals.”
US – EQUITY MARKET PERFORMANCE
US YIELDS & BONDS
The yield on the benchmark 10-year U.S. Treasury note rose sharply last week, seemingly pushed higher by the jobs and manufacturing data. (Bond prices and yields move in opposite directions.) The tax-exempt municipal bond market came under pressure as several new deals came to market, while a sale of tax-exempt holdings by the FDIC also increased supply.
In the investment-grade corporate bond market, primary issuance was notably above weekly expectations—a new issue from Pfizer marked the fourth largest on record. Conversely, the high-yield market saw low volumes throughout the week as investors digested debt ceiling headlines about positive momentum toward a deal. At the same time, hawkish Fed commentary weighed on rates. Several new deals were announced as earnings season continued to wind down, and companies looked to bring new issues to the market before the Memorial Day holiday.
US TREASURY MARKETS – CURRENT RATE AND WEEKLY CHANGE
3 Mth +0.07 bps to 5.22%
2-yr: +0.28 bps to 4.27%
5-yr: +0.28 bps to 3.73%
10-yr: +0.21 bps to 3.67%
30-yr: +0.14 bps to 3.93%
SOURCE: FOR THE WEEK ENDING, May 19, 2023. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.
INTERESTING NEWS OVERSEAS
Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.72% higher. Germany’s DAX climbed 2.27% among major markets, while France’s CAC 40 Index gained 1.04%.
European government bond yields climbed amid growing confidence in the European economy and a possible breakthrough in U.S. debt ceiling negotiations. The yield on the 10-year German bond rose toward 2.5%, its highest level in more than three weeks. In the UK, the yield on the benchmark 10-year gilt surpassed 4% as policymakers hinted that more monetary tightening could be forthcoming if inflationary pressures do not moderate.
Official data provided further signals that Europe might enter an industrial recession. Eurozone industrial production sank 4.1% sequentially in March after rising 1.5% in February. On a year-over-year basis, industrial output declined 1.4% after increasing to 2.0% in the preceding month. While Irish production led the drop—mainly due to the transfer pricing practices of multinationals—German, French, and Italian output also weakened.
In Germany, the ZEW economic research institute said investor morale fell for a third consecutive month in May. Its sentiment index entered negative territory for the first time since the end of 2022 amid concerns about rising interest rates. ZEW President Achim Wambach said Germany could slip into a mild recession.
Bank of England (BoE) Governor Andrew Bailey reiterated in a speech that monetary policy would have to tighten further if there was evidence of more persistent inflationary pressures. He predicted that inflation could slow significantly in April as energy increases drop out of the annual calculations. But policymakers “still judged the risks to inflation to be skewed significantly to the upside,” he said, noting that second-round effects would take longer to unwind than they did to emerge.
The UK’s unemployment rate increased to 3.9% in the three months through March from 3.8% in the three months through February, the national statistics office said. However, wage growth showed little signs of easing over the period. Average weekly pay, excluding bonuses, rose to 6.7% compared with a year earlier, from 6.6%.
Japan’s stock markets registered their sixth consecutive weekly gain, with the Nikkei 225 Index rising 4.8% and the broader TOPIX Index up 3.1%. Both indexes reached near 33-year highs during the week, boosted by solid domestic earnings, yen weakness, and strong overseas buying of Japanese equities. The sentiment was also supported by data showing that the Japanese economy grew by more than expected over the first quarter of the year, boosted by a post-COVID revival in consumption. Hopes that the U.S. government would reach a deal on raising the debt ceiling further added to investor optimism.
Chinese equities were mixed amid concerns that the country’s post-COVID recovery is losing steam. The Shanghai Stock Exchange Index gained 0.34%, while the blue-chip CSI 300 added 0.17% in local currency terms. In Hong Kong, the benchmark Hang Seng Index declined 0.90%.
Official data showed industrial output, retail sales, and fixed asset investment grew at a weaker-than-expected pace in April from a year earlier. Unemployment fell to 5.2% in April from March’s 5.3%, but youth unemployment jumped to a record 20.4%, raising concerns that the post-pandemic recovery is not strong enough to attract new talent.
THE WEEK AHEAD
In the US, investors will closely follow the debt ceiling negotiations. The hopes of a quick deal were dashed late Friday and into the weekend after Republican negotiators walked out of the meeting, saying the White House demands were unreasonable. The Fed minutes and speeches by several Fed officials will also get the market’s attention. During the week, expectations for another rate hike increased because of the solid data. Still, on Friday, Fed Chair Powell said that raising rates to curb inflation might be unnecessary because of stress in the banking sector. In addition, a slew of important data will be released, including personal outlays and income data, durable goods orders, flash PMI data from S&P Global, and new and pending home sales. Consumer spending is anticipated to rise slightly in April following a period of stagnation the previous month, while orders for US manufactured durable goods will likely decline after a notable rise in March. Furthermore, traders will closely monitor the advance estimate of wholesale inventories and second estimates of first-quarter GDP figures. Regional activity indexes such as the Richmond Fed Manufacturing Index, Chicago Fed National Activity Index, and Kansas Fed Manufacturing Index will also be scrutinized. As the earnings season unfolds, several prominent companies will report their financial result, including Zoom, Intuit, Palo Alto Networks, XPeng, NVIDIA, Snowflake, Medtronic, and Costco Wholesale.
Have a great week.
Stephen Colavito
Chief Investment Officer
This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. San Blas Advisory is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request.