Weekly Market Vibes

Benchmarks end mixed as investors watch debt ceiling negotiations

The major benchmarks ended mixed as investors watched carefully for signs of progress in negotiations over raising the federal debt ceiling. The technology-heavy Nasdaq Composite outperformed and ended the week up 23.97% for the year-to-date period—a stark contrast to the 0.16% decline of the narrowly focused Dow Jones Industrial Average over the period. Similarly, the Russell 1000 Growth Index ended up 20.75% over the period, while the Russell 1000 Value Index—heavily weighted in the struggling financials sector—was down 1.64%. Markets were scheduled to be closed on Monday, May 29, in observance of Memorial Day.

Relatedly, alongside the debt ceiling negotiations, the signal event in the week may have been Thursday’s 24% jump in the shares in chipmaker NVIDIA, which took the company’s market capitalization to roughly USD 963 billion by the end of the week and made it the sixth most highly valued public company in the world. Shares rose after the company beat consensus first-quarter earnings expectations by a wide margin and raised its profit outlook. The large move in such a heavily weighted stock reverberated throughout the major benchmarks.

“X-date” draws near

Debt ceiling negotiations resumed after President Joe Biden returned from Japan at the start of the week, but markets headed downward as signs emerged that little progress was being made. The S&P 500 Index fell 1.1% on Tuesday, its biggest drop since the start of the month, following reports that some Republicans in the House of Representatives were questioning the urgency of the deadline set by U.S. Treasury Secretary Janet Yellen for when the government would become unable to meet its obligations—the so-called x-date. On Thursday, the Federal Reserve released revised data showing that the Treasury’s General Account had dwindled to USD 49.5 billion by Wednesday—USD 18.9 billion less than a week before and USD 752.2 billion below its level a year ago.

Signs of renewed momentum in the talks seemed to spur a market rally on Friday, however. The Wall Street Journal reported that the two sides were nearing a two-year spending deal that also extended the debt ceiling over the same period. Republican House Speaker Kevin McCarthy also told reporters that his White House counterparts were being “very professional, very knowledgeable.”

Inflation gauge remains stubbornly high while consumers continue to spend

Friday’s gains may have been capped by some discouraging inflation data. The core (less food and energy) personal consumption expenditures (PCE) price index, considered the Federal Reserve’s preferred inflation gauge, rose by 0.4% in April, a tick above expectations. On a year-over-year basis, the index rose by a notch to 4.7%, indicating no progress in bringing inflation down since the start of the year. Meanwhile, the Commerce Department reported that personal spending had jumped 0.8% in April, roughly double consensus expectations and supported by increases in spending on both goods and services.

The signs of a resilient consumer and persistent inflation pressures led to a jump in short-term U.S. Treasury yields, with the yield on the two-year note hitting its highest level in over two months. Reflecting debt ceiling worries, the yield on the one-month Treasury bill hit 6.02% at the end of the week, its highest level since its introduction in 2001.

Continued sales of municipal bonds by the Federal Deposit Insurance Corporation (FDIC)—assets acquired following recent bank failures—weighed on the municipal bond market. In the investment-grade corporate bond market, the front-loaded week of issuance was adequately subscribed to before new issues slowed down as we approached the long weekend, while regional bank issues continued to rebound.

Meanwhile, the high yield market saw lower-than-average volumes throughout the week. Commercial mortgage-backed securities outperformed other types of credit, Treasuries, and the broad U.S. high-grade aggregate index. Volumes lightened over the week, but overall supply remained robust and met with solid demand.

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