A positive open to today’s stock trading appears in the cards, based on futures market activity. There are no major economic data reports scheduled for today, but, as traders prepare for business, New York Federal Reserve President John Williams is speaking on central bank policy and the economic situation. Later this morning, Fed Chairman Jerome Powell and former Chair Ben Bernanke will participate in a panel discussion on key financial issues. Notably, U.S. House of Representatives Speaker Kevin McCarthy has stated that Congress is making progress with the White House on a debt-ceiling agreement, sparking optimism on Wall Street. We believe the major market indexes can post decent gains this week, following two weeks of lackluster performance.
Through Tuesday’s close, stocks were mixed, with the tech-heavy NASDAQ Composite up almost 1% and the broader Standard & Poor’s 500 Index and the blue-chip Dow Jones Industrial Average both down marginally. Increasingly, Fed officials are guiding that, in their inflation-fighting strategy, another hike in short-term interest rates, possibly one-quarter of a point, might be decided upon at the coming mid-June Federal Open Market Committee meeting. The benchmark Federal Funds rate range is currently 5.00%-5.25%. Apparent stability in the regional banking sector provides the central bank some leeway in continuing to be aggressive.
The Fed continues to monitor economic data. We note that, early this week, the May Empire State manufacturing survey indicated contraction, April retail sales were generally positive (but managements’ forward guidance was tepid), industrial production for the same month modestly improved, capacity utilization ticked higher, and home builder confidence strengthened. Additionally, for April, housing starts posted a limited increase and building permits edged lower. Stocks visibly gained momentum on Wednesday and Thursday, especially as optimism about the debt-ceiling talks mounted.
Yesterday, jobless claims for the week ended May 13th were lower than expected, pointing to a still-healthy labor market. Data releases showed that existing home sales softened (due to slim inventories) and U.S. leading economic indicators continued to be negative in April. Following today’s dearth of new economic numbers, investors will get a read on S&P’s services and manufacturing Purchasing Managers Indexes, revised first-quarter 2023 Gross Domestic Product, jobless claims, pending home sales, durable goods orders, personal income and spending, and consumer sentiment next week. Foremost among the coming releases will be the latest information from the Personal Consumption Expenditures index, a key gauge for the Fed.
Assuming a debt-ceiling agreement is reached before the Memorial Day weekend, stocks will probably trade within a narrow range through the period leading up to the Fed’s June meeting. It seems that the White House and Congress will avoid driving the economy off the proverbial financial cliff. Still, for the short term, we advise caution. Economic activity seems to be slowing, but the data remains rather mixed. Investors should stay with stable large-cap equities, while maintaining significant weightings of cash and bonds in their individual portfolios.
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
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