Weekly Market Vibes

Stocks briefly break out of trading band in narrow advance

Stocks recorded solid gains for the 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. The market’s advance remained notably narrow as well, however. The equal-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 gain since early 2021 on Wednesday. The typically defensive consumer staples, health care, and utilities sectors lagged.

Sentiment benefits from better tone in debt ceiling negotiations

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 will be no default, while 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 deal. 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. Stocks seemed to waver a bit on Friday, however, after Republican negotiators announced that they had decided to “press pause” in discussions.

Much of the week’s economic data were generally in line 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 in part by increased auto manufacturing.

The 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 far too high and that officials were resolute about bringing it back 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.”

Bond yields rise on some upside economic surprises

The yield on the benchmark 10-year U.S. Treasury note rose sharply over the week, seemingly pushed higher by the jobs and manufacturing data. (Bond prices and yields move in opposite directions.) Our traders noted that 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, according to our traders—a new issue from Pfizer marked the fourth largest on record. Conversely, the high yield market saw somewhat low volumes throughout the week as investors digested debt ceiling headlines about positive momentum toward a deal while 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.

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