Weekly Recap:

by Eric Criscuolo & Michael Reinking, CFA

Last week the S&P 500 extended its weekly winning streak to six on its way to hitting a new round number milestone, 7400. In doing so it overtook the equal-weight index in year-to-date gains. That last part highlights how the mega-cap tech and AI trade has come roaring back to propel equities to record highs despite all the geopolitical headwinds. Much of the focus was on the semiconductor stocks as the ICE semis index gained 12%, while the DRAM (memory) ETF soared 30%.                 

This week started with Mother’s Day on Sunday. My flower order failed to be delivered to my Mom. Then President Trump characterized the Iran ceasefire as being on life support, with Iran’s response to the US proposal to end the war “totally unacceptable.” Not a good start.

However that was pretty much the extent of the substantial Iran headlines. With no significant escalation news, President Trump’s highly anticipated two-day summit with Chinese President Xi Jinping took the lead role on the geopolitical stage. For all the drawn-out lead-up to the meeting (it was postponed when the Iran war began), substantial announcements from it were lacking. That wasn’t terribly surprising though. The last-minute addition of Nvidia CEO Jensen Huang was a big story. He boarded AF1 at a pit stop in Anchorage. That led to some pretty great memes, which the MAC Desk is always thankful for. Jealous this one isn’t ours.

It turns out that JH wasn’t the only surprise attendee in China. NYSE President Lynn Martin was amongst the delegation of U.S. business and technology leaders participating in President Trump’s historic state visit.

A few of the takeaways from the summit:

Taiwan - According to Trump, Xi asked if US troops would defend Taiwan if China invaded. Trump told reporters, “There’s only one person that knows that—you know who it is? Me. I’m the only person.”

Iran - Both sides agreed the Iran war should end, the Strait should be open and free and Iran should never have a nuclear weapon. China later released a statement saying the US should never have started the war in the first place. The lack of a clear action plan from China is probably a reason stocks sold off on Friday.

Trade - There were no announcements of specific deals, commercial or otherwise, but both sides agreed to a new “strategic stability” in the relationship. Outside of an agreement for China to buy 200 Boeing planes- that hadn't been confirmed as of this writing- and more agriculture products and oil, detail were lacking on the new “fantastic trade deals” Trump mentioned. Xi will reportedly kickstart the ag products trade by sending Trump rose seeds for planting in the White House Rose Garden. That would be the same place where Trump announced the tariff policy last year.

The key economic releases this week revolved around inflation data (discussed below). The PPI generated the most discussion as the print was well ahead of expectations and saw the largest increase since early 2022. The Consumer Price Index was the other major data release. It usually attracts more attention than the PPI, but was broadly inline, maybe a touch hot, and so reactions to it were more muted. The takeaway from the two reports is that inflation is broader than just direct energy prices, and that is bringing expectations of a rate hike into the fold. In more Fed news, Kevin Warsh was confirmed by the Senate as the next Fed Chair, and he is now on the clock as Jerome Powell’s term ends today. Powell stays on as a governor, however, so hopefully we still get some meme out of him for a little while longer.   

Heading into today (Friday), the S&P 500 was up over 1% and reached a new milestone, trading above 7500. Extending the winning streak to 7 straight weeks looked more likely than not, pairing nicely with the Knicks’ 7 game playoff winning streak. On Friday, however, equities stumbled as global rates moved sharply higher and crude strengthened. While there was no specific trigger for these moves, the lack of any concerted effort by China to pressure Iran to open the Strait following the Trump/Xi summit likely played a role. Oil and yields moved higher. The stretched levels of the S&P overall (RSI ~75 heading into Friday) and in particular the AI supply chain also opened the door for a reversal. On top of this it was an options expiration, triggering positioning and hedging resets. 

The weak breadth metrics for equities have been prevalent topic recently. We noted last week the flagship S&P 500 market cap-weighted index has overtaken the equal-weight version.

On Wednesday, when the S&P 500 set another all-time high, only 173 stocks saw gains, while 328 fell. Only 40% of S&P stocks are above their 20-day moving average. Only about half are above their 200d moving average.

BITG’s Jonathan Krinksy noted that Russell 3000 members making new 52w Lows is rising, and diverging with those making 52w Highs.

The record levels are coming with less stocks pushing higher. Two ways you could look at that, depending on what type of animal you are: (1) the market is fragile and if the momentum in the smaller and smaller group of stocks that are working stops, the bottom falls out. (2) There’s room for rotation into lagging areas to drive the next leg higher.

The degree of under-allocation, especially to the really high-flying names, has also provided fuel for the upside charge as these investors are forced to chase at prices that keep getting away from them. 

It’s also notable that equities have been able to continue to hit new records despite energy and yields both continuing to climb higher (10y yield inverted in chart below). However, with the 10y finally breaking through 4.50% this week, and then 4.60% today, a few too many straws may have been placed on the camel’s back. 

The S&P fell 1% on Friday but managed to close the week modestly higher. The index extended its weekly winning streak to 7 and reached another round number milestone (7500) before pulling back. Like last week the S&P equal weight lagged, by over 1% this week. Small and mid-caps lagged significantly more, with most of the damage coming on Friday. 

The Energy sector led the way with saw sharp gains this week. Tech was a leader as well but the narrative wasn’t linear. The Long Hardware/Short Software trade was working into Friday. Most software names were lower (cybersecurity an exception), while the NYSE Semiconductor index, the NYSE 100 index and the DRAM memory ETF were all up 1-2%. However on Friday the script was flipped, semis and memory were sold hard, while software saw a strong bid that pushed the IGV ETF into the green. The DRAM ETF fell 5% to finish the week down 3%.

Healthcare also saw gains this week - a sector that has been a significant underperformer. Whether it’s just a temporary move or something more sustained remains to be seen. Consumer Staples- a more defensive sector than Healthcare- was also among the leaders this week but most components were lower, especially in the food group. Big box retailers were mixed, but tobacco names were up sharply. That’s not what you would usually see as leadership in a bull market.

Consumer Discretionary was the worst performer this week, even before Friday’s weakness. There was broad weakness but restaurants and gaming names held up well on Friday. Materials sold off at the end of the week, especially miners on the precious metals weakness. REIT’s were down across the board, especially the specialized names, including wireless tower REITS following news of T, TMUS and VZ forming a JV.

Economic Data

This week’s economic data highlighted the building inflationary pressure but a still resilient economic backdrop.

This week there were a trifecta of hot inflation prints with the second leg of the triple crown being run this weekend a horse racing reference seemed apropos. CPI was the first out of the gate and of the bunch was probably the least surprising.  On a m/m basis headline was inline with expectations, up 0.6% and up 3.8% y/y, a tenth ahead of consensus. Core was also slightly higher than expected month/month (0.4% vs 0.3%) and year/year (2.8% vs 2.7%). The areas where you’d expect to see an impact from Iran continued to move higher gasoline was up 5.4%, electricity 2.1% and food 0.5%. Commodities less food and energy- where the impacts of tariff policy would be seen- was unchanged m/m. Household furnishings, tools and appliances fell while apparel rose. The “surprise” was Shelter rising 0.6% and 3.3% y.y. which is largely being attributed to data collection and assumptions used by the BLS after the government shutdown (and was discussed in advance).

Next up was PPI which blew away estimates up 1.4% / 6.0% m.m/y.y, well ahead of the 0.5% / 4.8% estimates and the largest increase since April 2022. Final demand services accounted for much of the gains, led by Trade Services (i.e. retailer and wholesaler margins) rising 2.7% and accounting for ~40% of the 1.4% m/m increase. Transportation and Warehousing also saw a sharp increase (+5.0% m.m vs 1.8% last month). That lines up with last week’s LMI Logistics Managers Index which saw Transportation Prices hit the second-highest reading for the survey. This week Freight-Waves highlighted spot rates jumped $0.41/mile to $3.5/mile over the last week just below the ATH ($3.68). This suggests there is more inflation in the pipeline which will likely bleed into CPI. The third consecutive hot inflation report was yesterday’s import/export prices which doubled from last month, up 1.9%/3.3% m/m after increasing 0.9%/1.5% in March.

March Retail sales were inline with estimates (0.5%) but slowed from last month (1.6%). The control group came in a slightly higher than expected but also slowed. Auto vehicles fell 0.5%, home furnishings dropped 2.0% and clothing fell 1.5% while Electronics and appliances rose 1.4%, food/beverage 0.8% and non-store (online) retailers 1.1%. Overall, 9/13 categories posted increases and the report, while not robust, doesn’t provide much to change the overall narrative.

Weekly jobless claims came in slightly higher than expected but, remain historically low levels while continuing claims remained under 1.8ml. 

The NY Fed released the Q1 Household Debt and Credit Report. Total household debt increased by 0.1%. There was little change in delinquencies with 4.8% of debt at some stage. Transitions into early delinquencies did tick down slightly for both credit cards and mortgages. Potential strains on consumer balance sheets could be more evident in Q2 as this is predominantly BI (before Iran). 

Treasuries/Currencies - Rates were hovering just below recent highs throughout the week and then finally broke out to the upside today clearing some key round/technical levels. This is a global move in yields and in many ways Treasuries feel like they are getting dragged higher (more on this below).This seemed to be the primary driver of today’s broader equity weakness. The MOVE index has pulled back significantly from the April highs but did jump today. This will be key to watch next week. Chart 1 - 10yr yield. Chart 2 - ICE BofA Move Index

The USD strengthened throughout the week reclaiming its 200d.

Global Equities - Ended the week lower across the board with today’s yield induced weakness wiping out previous gains 

Next week Nvidia will highlight the earnings reports and look provide enough positive commentary to continue the AI trade, but we’ll also get some big retailers reporting as well, including Home Depot, Lowe’s, Target, TJX and Wal-Mart. Those reports are taking on even more importance after this week's inflation numbers.

On the macro side of things it will be a relatively quiet week. The minutes from the last FOMC meeting will generate some buzz, especially with an incoming new Fed Chair and the growing calls for greater emphasis on the inflation side of the mandate. Flash PMIs will highlight the economic releases, along with Pending Home Sales and Housing Starts. Most importantly, the Knicks will begin their battle in the Eastern Conference Finals- opponent TBD.  

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