Morning Roundup

By Mark Masterson on May 25, 2023

Good morning,

Below are the news items moving markets today:

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Executive Summary:

After yesterday’s declines, markets again look to rise on the back of tech earnings.  Tech leading the way once again up 2% pre-market while the Dow is negative and the S&P 500 flat.

More on that below.

First – here is the summary of the Fed minutes released yesterday…….

May FOMC meeting minutes show officials split on further rate hikes.  A pause looks likely at the next meeting in June.  But – no intention to cut rates later this year either.

• StreetAccount notes that the May FOMC meeting ended with a 25 bp rate hike to 5.0-5.25%, as expected, in a unanimous decision.
• The Fed refreshed the policy statement language to say any additional policy firming will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
• However, Fedspeak has leaned hawkish since the meeting, including Fed Governor Waller saying today he does not expect data in next couple of months to make it clear terminal rate has been reached. Waller also added that rate hikes need to continue until Fed confident inflation is moving down towards 2% target.
• Some officials stressed that it was crucial to communicate that the language in the policy statement should not be interpreted as signaling either that decreases in the target range are likely or further increases in the target range had been ruled out.
• Based on expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.
• Participants were generally uncertain about how much more policy tightening may be appropriate, while many participants focused on the need to retain optionality after this meeting.
• Staff forecasts continue to forecast a mild recession starting later this year given expected further tightening in financial conditions and bank credit conditions.
• Participants emphasized a data-dependent approach, and the vast majority of participants said that the adjusted language in the policy statement was helpful in that respect.
• A debt default would threaten to significantly disruption the financial system and lead to tighter financial conditions that weaken the economy.

I mentioned above that tech is moving higher this morning on the back of earnings from Nvidia….

• Nvidia guides Q2 revenue above expectations on strong AI processor sales (Bloomberg)
• Nvidia’s upbeat Q2 results spark nearly $300B rally in AI stocks (Reuters)

A few facts about NVDA I saw last night…..

• Nvidia trades at >30x revenues.
• After-hours gains, near $1T mkt cap vs. $30B 2024 sales estimate from Wall St. analysts.
• NVDA’s post-market gain > nearly all of the revenue its generated since the company’s inception.
• It’s trading at 7X high P/E than both Apple and Microsoft.

Fair valuation? 

Of course, Wall Street is now jumping over themselves to raise price targets.  Here is a printout of all the upgrades overnight…..

A bit late, no?

Walter Bloomberg 5 25 23

Interesting charts below from RBA Advisors suggesting that a credit crunch may be on the way.

From RBA….

Charts 1 and 2 highlight how the weakest companies are feeling the heat of tighter lending standards and higher interest rates.

The first chart clearly shows that repeat bankruptcies – those companies that have defaulted before and have now defaulted a second time – are nearly at all-time highs.

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RBA Advisors 5 24 23

The second chart should concern private credit managers. Note that small private companies (the types of companies found in private credit portfolios) are defaulting at an alarming rate compared to larger public companies. Small companies are typically the canaries in the credit mine

RBA Advisors 5 24 23

Here is the latest on the debt ceiling…..

• Debt ceiling:
  • Fitch puts US AAA credit on Watch Negative amid debt ceiling impasse (Bloomberg)
  • McCarthy still optimistic of reaching debt ceiling deal in time to avert default but gaps remain on spending levels (FT, Bloomberg)
  • Any debt ceiling deal still faces procedural hurdles in Congress, leaving little time to avert default (Bloomberg)
  • House Democrats frustrated Biden is not championing their priorities in his debt ceiling talks with Republicans (Washington Post)
  • Yields on T-bills maturing in early June surge above 7% amid debt ceiling fears (Bloomberg)
  • Proposed cuts to nondefense discretionary spending would have little impact on budget (NY Times)

More on the markets below…..

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Articles of Interest:

• Central banks:
  • FOMC minutes show policymakers ready to act if debt ceiling standoff destabilizes markets (Bloomberg)
• Politics:
  • Florida Governor Ron DeSantis kicks off presidential campaign (Washington Post)
• Geopolitics:
  • White House says China’s actions against Micron won’t hinder efforts to improve US-China relations (Reuters)
  • China rejects claims that its spies are penetrating Western infrastructure (Reuters)

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Charts of the day:

This is becoming one of the most concentrated, narrow markets I have seen in my career.

Below shows the markets performance of the top 5 names in the S&P 500 – and everything else…..

I believe a narrow market is an unhealthy market.  Investors should be rooting for a more broad advance here if they want this to turn into a true bull market, rather than an extended bear market rally.

Lance Roberts 5 25 23

The US dollar keeps pressing higher.

So far, this breakout looks like it wants to move up to the 200 day moving average.  It is nearing overbought, however.

The higher dollar is keeping a lid on commodities, pressing gold lower, but not impacting equities too much yet.

Interesting longer term chart showing the gold to S&P 500 ratio.

Is it bottoming again and getting ready to turn higher?

‘Gold looks clearly undervalued compared to US equities and may indeed have completed a secular turnaround.’ https://ingoldwetrust.report/?lang=en

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Quote of the day:

“Confusing the price with the story is the biggest mistake an investor can make.”  — Peter Lynch