Macrosynthesis

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Last Week's Recap

U.S. equities saw significant gains amid optimism surrounding a potential debt ceiling agreement, with the Dow Jones rising by 329 points and S&P 500 gaining 1.3%. Nasdaq Composite saw a leap of 2.2% largely due to Marvell's stocks spiking by 32% on the back of robust revenue forecasts attributed to AI technologies, mirroring Nvidia's recent performance.

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Treasury Secretary Yellen assured the ability to service US debts until June 5, providing some breathing room for debt ceiling negotiations. This hopeful news came amidst signs of a compromise between the White House and Republican negotiators on a two-year increase in the debt ceiling, despite ongoing disputes. Even as PCE inflation data exceeded expectations, the bullish market mood was sustained.

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In the corporate world, GAP shares jumped 12% following impressive earnings and Nividia earnings turned everyone into believers AI will eat the world, as the chipmaker's stock soared +25% on upbeat forecasts.

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A year over year look at earnings growth among S&P 500 components by sector shows a mixed picture of economic strength (above graph). Consumer discretionary, industrials, and energy stocks showed high growth while health care, communication services, and real estate companies showed decreased growth.

The Week Ahead

US debt-ceiling negotiations near a potential compromise with a June 1st deadline set by the Treasury Department approaching. The two sides are $70 billion apart on a total discretionary spending figure of over $1 trillion. Meanwhile, upcoming labour market reports could shed light on the health of the job market ahead of the Federal Reserve's June meeting, with the economy projected to add 193,000 jobs in May. Other notable economic indicators to watch include April's job openings and the ISM Manufacturing PMI.

Europe will see minutes from the ECB's last monetary policy meeting, flash CPI reports, and retail sales in Germany. The Euro Area's annual inflation rate is forecasted to drop to a 15-month low of 6.3% in May.

In Asia, official Chinese NBS PMIs and the Caixin manufacturing PMI will reflect on the economic recovery in May, while Japan will release a suite of economic data. India's GDP growth for Q1 could show an annual expansion of 5%, surpassing 4.4% in Q4 2022.

U.S Manufacturing

In April 2023, new orders for US-manufactured durable goods saw an increase of 1.1 percent, surpassing market predictions of a 1.0 percent decline. This follows a significant 3.3 percent rise in March.

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The transport equipment sector reported a substantial 3.7 percent surge, primarily driven by a 32.7 percent increase in demand for defense aircraft, which compensated for the decreases in civilian aircraft (-8.3 percent) and vehicle orders (-0.1 percent). There was also a 1.0 percent growth in machinery demand, while orders for computers and electronic products, electrical equipment, appliances, components, and primary metals all saw declines ranging from -0.5 to -1.4 percent. Crucially, non-defense capital goods orders (excluding aircraft), a key indicator of business spending plans, rose by 1.4 percent, recovering from a 0.6 percent decrease in March.

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Are You Spending Less?

In April 2023, personal spending in the United States rose by 0.8% month-on-month, marking the highest increase in three months and exceeding market predictions of a 0.4% increase. This upswing demonstrates continued robustness in consumer spending, driven by increased wages and a robust labour market.

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The major contributors to this increase were financial services and insurance, healthcare, and professional services within the services sector, while motor vehicles and parts - particularly new vehicles - and pharmaceutical products spurred spending within the goods sector. Furthermore, real personal consumption expenditures, adjusted for price changes, rose by 0.5%, with goods spending increasing by 0.8% and services by 0.3%. Lastly, the March figures were revised upwards, showing a 0.1% increase rather than the initially estimated flat reading.

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Last Week's Top Events

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Noteworthy Events  

The Debt Ceiling

Democratic President Joe Biden and Republican House Speaker Kevin McCarthy have reached an agreement to suspend the federal government's $31.4 trillion debt limit, thereby averting a possible default scheduled for June 5. The deal, drafted by aides from both parties during closed-door negotiations, is yet to be formalized into legislation, a task that McCarthy pledged to undertake on Sunday. However, challenges persist as the agreement must navigate the deep partisan divisions in the Republican-led House and Democratic-controlled Senate. Leaders from both sides have begun preparing their members about the deal's details, hoping to secure sufficient support.

The deal could face opposition from the conservative House Freedom Caucus and some liberal Democrats, potentially stalling its progress. McCarthy will assess the agreement's chance of passing before deciding on the next step, which could involve reconsideration or risking a vote in the House.

A last-minute agreement to increase the U.S. debt ceiling to $31.4 trillion may redirect Wall Street's focus to other potential risks such as further Federal Reserve interest rate increases and anticipated cuts in fiscal spending. After the Federal Reserve's meeting on May 3, where it suggested a possible pause in its aggressive rate hiking cycle, investors began investing more heavily in equities and other riskier assets.

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In a significant shift from tradition, the debt ceiling deal is rumored to not specify a cap but to remain unlimited until January 1st, 2025. This essentially means that the debt ceiling will be uncapped for roughly 1.5 years, an occurrence that many analysts believe is being underestimated in terms of its potential implications.

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Prior to this, the total US debt was predicted to reach $50 trillion by 2033. However, this projection could be met earlier, particularly if an economic downturn occurs in the following year. This is separate from the ongoing debt crisis affecting individual Americans, with total household debt hitting a record of $17.1 trillion and credit card debt approaching $1 trillion.

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An Eye on AI

Nvidia's shares surged over 25% on Thursday after an exceptional earnings report that exceeded Wall Street's expectations, propelling the tech stock to a historic high. Analysts predict a further rally, potentially reaching a 38% increase. This surge followed a quarterly report that showed impressive sales and profit figures, largely driven by the firm's significant role in the AI boom.

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The company added approximately $150 billion to its market capitalization, attracting favorable reactions from analysts. Notably, FactSet recorded 28 upward revisions to Nvidia's stock price target within 24 hours of the report's release. The boldest among these was from Rosenblatt analyst Hans Mosesmann, who nearly doubled his price target from $320 to $600, suggesting a 38% upside.

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So far this year, the S&P 500 index has seen an overall increase of 9%. However, this growth appears to be largely driven by just seven tech stocks, which have collectively surged by 45%. When these tech stocks are removed from the equation, the remaining 493 stocks in the index have only increased by a mere 1%. This suggests that these few, AI-focused tech stocks are essentially propping up the entire market.

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Market predictions for another 25 basis points rate hike by the Fed in its June 14 meeting have jumped from 8.3% a month ago to a nearly even chance now.

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Pfizer Slimming Down

Pfizer announced that its weight loss drug showed similar results to the Novo Nordisk's weight loss drug in a Phase II trial. The market also has room for both drugs but it's clear Pfizer has an aggressive plan to replace lost COVID vaccine revenues with new drugs.

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CASE STUDY: Navigator Holdings Ltd.

Navigator Holdings Ltd., a global operator of liquefied gas carriers, announced a new return Stock Buyback on Monday after market close. This new share repurchase plan authorizes the company to buy back up to $25 million of its own common stock. The company also plans to incorporate a future dividend policy.

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LevelFields users were alerted to the Stock Buyback announcement at 5:15pm on Thursday, resulting in a +12.10% 1D jump in share price.

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Upcoming Catalysts:

Notable Earnings

Monday

• Market Closed

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Tuesday

• HP (HPQ)

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Wednesday

• Salesforce (CRM)
• C3.AI (AI)
• Chewy (CHWY)
• CrowdStrike (CRWD)
• GameStop (GME)
• Trip.com (TCOM)

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Thursday

• Broadcom (AVGO)
• ChargePoint (CHPT)
• Dell Technologies (DELL)
• MongoDB (MDB)
• Dollar General (DG)
• Lulu Lemon (LULU)

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Economic Reports

Tuesday

• Consumer Confidence

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Wednesday

• April Job Openings

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Thursday

• U.S. Productivity

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Friday

• U.S. employment report

This is not financial advice. All information represent opinions only for informational purposes.

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The LevelFields Team