Weekly Market Vibes

Favorable macro backdrop helps end solid quarter on solid note

Positive growth and inflation surprises helped the major benchmarks round out a solid quarter on a high note, with the S&P 500 Index recording its best weekly gain since the end of March. The rally also broadened, with small-caps and value shares outperforming, and the equal-weighted S&P 500 Index handily outpacing its market-weighted counterpart. The technology-heavy Nasdaq Composite remained well ahead of the other benchmarks for the year-to-date, however, ending the week with a six-month gain of nearly 32%, its best start to the year since 1983.

Notably: Apple closed trading Friday with a market capitalization above USD 3 trillion, marking a first for a publicly traded company. The Wall Street Journal reported that Apple’s valuation has surpassed that of five of the S&P 500’s 11 sectors in their entirety (materials, real estate, utilities, energy, and consumer staples).

Disinflation signs boost sentiment

Inflation data released Friday appeared to provide the biggest boost to sentiment. The Commerce Department reported that its personal consumption expenditures (PCE) price index had increased by 0.1% in May, bringing its year-over-year increase down to 3.8%, its lowest level since April 2021. The core (excluding food and energy) PCE index, considered the Federal Reserve’s preferred inflation gauge, fell back to 4.6% on a year-over-year basis, still well above the Fed’s 2% target, but seemingly calmed fears of a re-acceleration in price pressures after April’s upside surprise.

Among the other signals of strength in the week’s heavy economic calendar:

-Private sector incomes rose 0.5% in May, according to Commerce Department data, well in excess of a 0.1% increase in consumer spending.

-Weekly jobless claims defied expectations and plummeted by 26,000 from a 20-month high to 239,000, marking the sharpest drop since October 2021. Continuing claims also surprised on the downside and fell back to a four-month low.

-The University of Michigan revised its gauge of consumer sentiment higher, pushing it to its best level in four months. The survey’s chief researcher attributed the “striking upswing” to the resolution of the debt ceiling standoff but also to “more positive feelings over softening inflation."

-Durable goods orders rose 1.7% in May, defying consensus expectations for a decline of around 1%. Importantly, orders excluding the volatile defense and aircraft segments—widely considered the best proxy for business investment—rose 0.7% after falling the previous month.

-Similarly, May new home sales easily outpaced estimates, rising 12.2% in May, well above expectations for a modest decline and at the fastest pace since February 2022, when rates for a fixed 30-year mortgage were nearly 300 basis points (three percentage points) lower.

Data push Treasury yields higher, while munis outperform despite Puerto Rico ruling

What was good news for equity investors was bad news for the Treasury market, as the data helped briefly push the yield on the benchmark 10-year note to 3.87 in intraday trading on Friday, its highest level since March 9. (Bond prices and yields move in opposite directions.)

Sentiment around tax-exempt municipal bonds deteriorated early in the week after a judge in Puerto Rico delivered a ruling in a bankruptcy case involving utility bonds that was perceived as unfavorable to bondholders. (Munis issued by Puerto Rico are widely held because their income is tax exempt in most states.) However, municipal bonds outperformed Treasuries later in the week, and muni-Treasury ratios ultimately richened. The final sale of municipal bonds held by the FDIC after taking a few regional banks into receivership earlier this year reached the market on Thursday, which bolstered sentiment.

The investment-grade corporate bond market saw low levels of issuance in advance of the holiday. Those that did come to market were met with strong demand, as midweek issuance was oversubscribed, and spreads consistently tightened throughout the week despite the volatility in rates.

Broad risk-on sentiment supported the high yield market’s performance, with investors trying to source paper ahead of quarter-end and manage cash levels given that no issuance was expected until after the Independence Day holiday. In the bank loan market, managers of collateralized loan obligations were mostly focused on loans trading at a discount and drove most of the buying

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