STRAIGHT FROM THE TRADING FLOOR
by Michael Reinking, CFA - Sr. Market Strategist
Patricia Medina - Market Strategy Analyst
DOW 33,763 (+701), S&P 500 4,282 (+61), Russell 2000 1,831 (+63), NYSE FANG+ 7,364 (+50), ICE Brent Crude $76.40/barrel (+$2.12), Gold $1,964/oz (-$31), Bitcoin ~27.3k (+395)
With a 1.5% rally today the S&P 500 extended its weekly winning streak to three consecutive weeks and decisively broke above 4,200, a level that has capped the index throughout this year. The NYSE FANG+ index continued its march higher extending its weekly winning streak to six weeks, the longest stretch since May - July in 2021. The strength this week was a mix of the removal of the debt ceiling overhang and economic data which suggests the labor market remains resilient while some of the inflationary pressures are easing.
Before we get into some of those topics let's quickly recap May. It was a month where the market seemed to be in the need of some Listerine as the breadth was pretty bad. Outside of the bad dad/technical analyst humor the theme does seemed pretty fitting considering Kenvue, the owner of the Listerine brand, had the largest IPO of the year here on the NYSE during the month. In May the S&P 500 was able to squeak out a modest gain (0.2%). However, the equal weight version of the index fell 4% during the month moving into negative territory for the year. The Dow Jones Industrial Average and Russell 2k were also in the red YTD as of Wednesday's close though they are back in the green after the late week rally. On the flipside the NYSE FANG+ ended the month up ~17% bringing YTD gains to >60% with the blowout Nvidia earnings late last week powering the final surge. It was also a tough month for commodity markets pretty much across the board highlighted by a sharp fall in energy prices with ICE Brent down nearly 10% and natural gas prices falling by more than that. I've included May performance in the tables below.
Historically, June is not a great month from a seasonal perspective though it tends to be better in pre-election years. Since 1970 the average return for the S&P 500 in the month is 0.2% with the index closing higher ~60% of the time that improves to 1.7% and ~64%, the year before Presidential elections.
End of the Debt Ceiling Saga
Last weekend President Biden and House Speaker McCarthy reached a deal in principle and that ultimately passed the House on Wednesday evening and the Senate late last night. This has removed an overhang from equity markets but as we've pointed out throughout the process most investors expected this outcome in the eleventh hour and this never really caused significant weakness. Other areas of the financial market that were impacted like very short dated Treasury markets and US CDS markets have been unwinding since late last week.
Since markets always love to focus on the next impending doom, hence the old saying climbing the wall of worry, the narrative has now shifted to the dark side of this resolution. As the debt ceiling negotiations dragged on coupled with lower-than-expected 2023 tax receipts the U.S. Treasury cash level has been dwindling. The General Account at the Treasury had cash balances below $50B in its most recent filing falling by >$400B this year. Options to replenish this account include T-Bill issuance, repos, reserve requirements, etc. Multiple investment banks have estimated that over $1 trillion of T-Bill issuance is expected by year-end.
The combination of issuance methods, volume, pace, and other factors are yet to be decided though might have a noticeable impact across asset classes. This flood of issuance could push yields higher, while a drop in bank reserves could reduce lending hence investment in the economy. As liquidity gets drawn out of the system this can lead to bouts of volatility. However, the flipside to this argument is that issuance could be taken up by money market funds which have been parking cash in the Fed's Reverse Repo Facility which would be far less impactful to liquidity conditions.
The recent economic data continues to suggest the economy remains resilient. The focal point this week was on the labor market and broadly that data was better than expected though there are some question marks in today's BLS Employment Report. As we've highlighted over the last couple of weeks the Employment components in the regional/PMI surveys along with the claims data were suggesting that we might see a strong headline number today and we got just that. In the month of May 339k jobs were added to the economy, well ahead of the ~185k estimate, with gains spread out across industries. In addition, there were positive revisions totaling 93k in the prior two months. The household survey told a bit of a different story showing the number of employed people fell by 310k which pushed the unemployment rate up to 3.7% from 3.4% last month. Wages showed some deceleration increasing 0.3%/4.3% down from 0.5%/4.4% last month while the hourly workweek ticked down to 34.3 from 34.4. As you can tell this is a bit of a head scratcher and there is something for everyone here, it just depends on where you want to focus. However, one thing it doesn't do is suggest a material weakening in the labor market and it also doesn't settle the "What will the Fed do next?" debate either.
While this week was Jobs Week there were some positive developments on the inflation side of the equation. Earlier this week Eurozone CPI showed significant deceleration falling to 6.1% from 7% last month. In the US one notable piece of data was the drop in the prices components of yesterday's ISM Manufacturing PMI which fell to 44.2 from 53.2, resuming the move lower after ticking up throughout most of the year (see Chart 1). There was also a large revision to Q1 Unit Labor Costs which fell to 4.2% from 6.3%, though some of this was due to an improvement in Productivity which was revised to -2.1% from -2.7%. Today's wages data showed some deceleration and the FAO Food Price Index declined 2.6% in April and is now down 22.1% from the high hit in March of 2022 (Chart 2).
Last week there was a significant re-pricing in the probability for a rate hike in June amidst a steady drum beat of hawkish Fed commentary. I said, "I think a coin flip is fair and if I had to pick a side before the next round of data I'd lean pause given the Powell/Williams commentary last Friday, as they are the only two official members of the "Troika" at this point". Well this week comments from the other would be member of that "Troika" got the markets attention as Fed Vice-Chair nominee Phillip Jefferson signed off on the idea of a "skip" in June which was also echoed by Fed Harker. Committee members have been unified in their message that this does not necessarily mean that the tightening cycle is over. Following those comments the probability for a June hike went from >70% to between 25% - 33% since. Expectations for a July hike have firmed up following today's data.
At either of the last two meetings I thought the Fed could have paused, sorry skipped, given the evolving backdrop as I didn't think they would lose control of the inflation battle. While the economic data has remained resilient we are getting some more signs that the disinflationary process is taking hold, though not as fast as one might hope. The impacts of the tightening of credit conditions are still unknown and will take time to work through the system. While some have suggested that the resolution of the debt ceiling gives the Fed the all clear to hike in June, I'd argue that they might want to see how the Treasury issuance we discussed above impacts liquidity and banking deposits/reserves adding to the reasons for a pause. Keep in mind we still get CPI on June 13th the day before the Fed's next rate decision.
Yields had been moving lower throughout the week testing the upper end of the range that they had just broken out from (similar to equities) but then moved sharply higher today reversing a good portion of that move. Speaking of move......the ICE BofA MOVE Index has moved sharply lower which as we've highlighted has had a positive correlation with equity returns.
There was some volatility in currencies this week driven by the eco data and central bank comments but at the end of the day the USD index ended right ~$104 again.
Credit spreads had widened modestly throughout the week but there was a significant tightening today especially HY.
Equity markets started this week moving modestly lower with that bad breadth that we discussed earlier. However, as the calendar page turned on Thursday so did the market and the breadth improved markedly. The strength was driven by resolution of the debt ceiling, the China Manufacturing PMI coming in better than expected, rumors of China policy support and then today's jobs data put a cherry on top.
There was broad participation with even the small and mid-cap stocks joining in on the action. From a sector perspective cyclicals led to the upside in the back half of the week while defensive sectors underperformed.
Modest move higher in global markets this week though the sharp rally in Hong Kong/China indices on stimulus hopes had broad implications on EM markets and commodities
Commodities also snapped back on the China optimism. Gold pulled back in the risk on environment.
The Technicals Still Matter:
Before decisively breaking out of the longer term range over the last two days the S&P 500 pulled back to test the upper end of the more recent range earlier this week. At the highs today the S&P 500 got pretty close to the first upside target we laid out in last week's comments and over the last two days the breadth has markedly improved which is a positive sign. We'll want to see some commitment to the strength next week holding in the upper half of this week's range over 4,200 would be a good step.
The S&P 500 squeezed through the upper end of the very recent 125pt range that's been in place since the end of April (~4,050 - ~4,175). This pushed the index right up to the YTD highs and the closely watched 4,200 level.
If you take a step back the index has really been in a larger range between call it 3,800 - 4,200 since the low was put in, following the 5% intraday reversal in October after the hotter than expected CPI print. You could even argue that this range has been in place since the breakdown a year ago with a couple minor violations in either direction. The smaller 125pt range we just discussed has been in the upper third of that larger range.
The break above the very short-term range targets a move to ~4,300 which coincides with the August highs before the Jackson Hole "Pain" speech. Today we closed at 4,205 we'd want to see some more significant separation from the key level, an RSI confirmation and hopefully some improved breadth. If that happens that targets a move to ~4,600. As negative as the narrative and sentiment have been the technicals have been much more constructive the whole way up as we continue to make a series of higher lows and higher highs.
Another tag of the 200d this week before the sharp rally today.
We've noted some of the underperformance of this index throughout the year. It did tag and bounce off its 200d this week.
The pullback earlier this week held at last week's low and then with today's rally the index broke above the key 1,800 level and closed back above its 200d. The measured move on this range break would take the index back up to ~1,900 which is where it was prior to the banking flare up in March. Regional banks were up >5% today.
This has been the big underperformer. With the regional bank rally earlier this week there was an attempt to break above the upper end of the recent range but this failed right at the 200d. The one positive is that on the pullback the 20d caught price and for the moment it is a higher low. The real key level is clearing 1,800 before we can get more constructive.
NYSE FANG+/ICE Semi
The NYSE FANG+ had some sideways action to start the week but extended to the upside. This is in straight momentum mode and has gotten pretty extended. There was some underperformance today with the index closing 100pts of its intraday high signaling some exhaustion. On any pullbacks see how this interacts with the 20d which is currently <6,800 but does have a big delta. In a similar vein earlier this week I highlighted the big topping tail in the ICE Semi index (Chart 2) which didn't really participate in the rally for the last two days.
If these two leadership areas of the market can just mark some time that would be positive action and if the other underperforming areas of the market narrow the spread that would probably be a best case scenario from broader market perspective.
NYSE FANG+ - And for the chart of the year. We noted the breakout above highs early this month and RSI quickly confirmed this move and we've rallied ~1k pts since. At this point the move has taken the index back into the level where it broke down from last January and into a bigger overhead resistance zone. The move is pretty extended at this point so at the very least some digestion is in order. Holding above 7k next week would keep it in the upper third of this week's range (commitment to strength).
There was a vol smash this week with the VIX hitting new lows presumably as hedges got taken off. The new vol regime hypothesis we laid out early in the year has been playing out and we are back at levels not seen since 2021. This keeps systematic flows coming into the market. Early we highlighted the MOVE reversal which could be an additional positive should it continue.
There was a little bit of a pop in the VIX earlier in the week but it held below the early May highs ~21. No real signs of concern here. One thing that is slightly concerning is the recent jump in the ICE BofA MOVE index as we've highlighted the inverse relationship with equity returns over the last year.
Yields pulled back earlier this week to retest the upper end of the recent ranges before bouncing today this still feels like higher especially in absence of Fed commentary next week.
We highlighted the range break in the 2yr yield and this has since extended higher, the projected move is to ~4.75% we got up to 4.65% earlier today. (Similar dynamic in 10yr)
Nothing too notable here this week there was a failed break above last week's high before the pullback.
The USD hit the $104 target laid out 2 weeks ago after its range break. This is in the process of building a solid base and held the 50% retracement level ~$101.Still has some work to do. The 200d ~106 is a big level.
This kind of played out like clockwork the rally into the 20/50d failed with a big bearish engulfing candle today. Key level to the downside is 100d/last weeks low between 1,940-1,950. Other comments hold. There were two big back to back topping tails on the monthly so I lean lower until picture changes.
We noted the failed breakout and topping tail earlier this month and the bounce made a lower high. 2k and 1,980 were the key levels in mid-May we thought that break could take us down to ~1,900 which was where the 100d was, that has now caught up to price providing some support here. The key will be how this trades on a bounce attempt into the declining 20d/50d. This chart is very constructive long-term. I've thought this would need to regroup before taking out the all-time highs. That monthly candle is still forming but doesn't look great if we close around this level.
This once again broke below $75 but did hold above the May lows before bouncing on the China optimism and ahead of OPEC+ this weekend. Range frustration continues key levels
This has been in a big range between $75 - $90 there have been a couple of minor breaks below the low end of that range. The first "ouching" for shorts came from OPEC+ in April following the surprise production cut but that was not long lived. This most recent bounce has not been able to clear the 50d ~78.50 and unlike the S&P this has been consolidating in the lower third of the range so seems susceptible to the downside.
Really nothing notable here. An attempt to break above 27.5k failed at the 50d. The 100d is catching up to price which now coincides with the recent lows ~25.8k so this is key level to watch on the downside.
Has really just been drifting a bit lower not much to say. Watch 26k recent low and the 20d (~27.5k) for clues. The 100d is starting to catch up to price ~25.25k that is also a retest of the upside breakout zone.
What's on Tap Next Week:
We move into a bit of a calendar void next week as late cycle earnings trail off and the Fed enters its media blackout window. In terms of economic data the most impactful data comes on Monday with China/US ISM Services PMIs. The OPEC+ meeting this weekend could add some intrigue following the "ouching" comments. There are a couple of central bank rate decisions including Australia and Canada. Apple's Worldwide Developers Conference will get some attention. Have a great weekend!