Weekly Market Vibes

The major benchmarks ended with solid gains for the week, with the S&P 500 Index touching its highest intraday level since mid-August 2022. The technology-heavy Nasdaq Composite Index notched its sixth consecutive weekly gain and hit its best level since mid-April 2022. In contrast with the past several weeks, however, the rally was broad-based, with strong gains in both value and growth stocks, as well as small-caps. Markets were closed on Monday in observance of Memorial Day.

Investors shrug off debt ceiling agreement

News that the White House and Republican congressional leaders had reached an agreement over the preceding weekend to raise the federal debt limit and stave off a default on governmental obligations seemed to have limited impact on sentiment—perhaps because enough signals had previously emerged that a deal was imminent. The House of Representatives passed the bill by a surprisingly large margin on Wednesday, but this also seemed to have limited impact on markets. After the Senate’s passage of the measure late Thursday, the bill headed to President Joe Biden on Friday for his signature into law.

Instead, investors appeared to return their attention to economic data. On Wednesday, stocks pulled back following news that job openings rebounded much more than expected in April and hit their highest level (10.1 million) since January. March’s data were also revised higher.

Friday’s closely watched non-farm payrolls report also surprised on the upside, but the details in the report seemed to suggest that the labor market might be cooling. Employers added 339,000 jobs in May, well above consensus expectations for around 190,000. But the unemployment rate—estimated by surveys of households—also surprised by rising to 3.7% from 3.4%. Suggesting a more difficult job market for workers, the Labor Department reported that the number of people losing jobs or completing temporary jobs jumped significantly in May and reached its highest level since February 2022. The number of longer-term unemployed remained relatively constant, however.

Cooling factory prices bode well for inflation

Another encouraging sign for interest rates and investors was the release Thursday of the Institute for Supply Management’s (ISM’s) Manufacturers Purchasing Managers’ index for May. The ISM’s gauge showed a seventh straight monthly contraction in factory activity, as expected. Encouragingly, however, prices paid for supplies and other inputs by manufacturers contracted at the fastest pace since December, defying expectations for a modest increase.

The encouraging inflation signals appeared to drive a decrease in longer-term U.S. Treasury yields, while the finalization of a debt ceiling agreement led to a plunge in the yield on one-month Treasury bills, from 6.02% intraday the previous Friday to 5.28% at the end of the week. The debt ceiling agreement provided an additional tailwind to the municipal market.

New issuance was front-loaded in the investment-grade corporate bond market, with a sizable offering from retailer CVS. Early redemptions, coupon payments, and tenders added over USD 6 billion to the high yield bond market this week and supported prices. Positive developments in the debt ceiling negotiations also bolstered the performance of broader risk markets. The primary market was quiet with limited issuance, but more new deals are expected to be announced next week.

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