Verum Macro Focus...

A macro focus

There wasn't a lot of change in the major indices this week, which continued in a consolidation pattern following the huge run off the April 7 lows.

A nine-session win streak for the S&P 500 was broken on Monday, serving as a precursor to a week where outsized moves were reserved for individual stocks with news, like Dow component Walt Disney (DIS), which impressed with Q1 results and better-than-expected guidance for the full year, and Alphabet (GOOG), which struggled on concerns about AI challenges to its search business.

It was a huge week of earnings reporting, yet most of the market's concentration was on the macro picture that included the following highlights:

• OPEC+ agreeing to raise its production output in June by 411K barrels per day.

• The U.S. trade deficit hitting a record $140.5 billion, as imports surged in a tariff frontrunning move.

• India launching attacks on nine sites in Pakistan, and Pakistan vowing a response to those attacks.

• An indication that Treasury Secretary Bessent and U.S. Trade Representative Greer will meet China's Vice Premier He Lifeng in Switzerland this weekend with an aim of de-escalating the tariff/trade situation.

• The People's Bank of China lowering its 7-day reverse repurchase rate by 10 basis points to 1.40% and the required reserve ratio by 50 basis points to 9.00%.

• The FOMC voting to leave the target range for the fed funds rate unchanged at 4.25-4.50%, and Fed Chair Powell declaring that the Fed will be patient before making any policy moves as it needs to see more data to understand better how the new administration's policies are affecting economic activity.

• The Bank of England lowering its cash rate by 25 basis points to 4.25%, as expected.

• President Trump announcing the first trade deal with the UK, which will involve keping the baseline 10% tariff rate; and noting that a number of other trade deals should be following soon.

• President Trump touting the reconciliation bill and suggesting one should buy stocks now.

The best-performing sectors this week were the industrials (+1.1%), conumer discretionary (+0.8%), and utilities (+0.5%) sectors. The worst-performing sectors were the health care (-4.3%), communication services (-2.4%), and consumer staples (-1.1%) sectors.

The 2-yr note yield increased four basis points on the week to 3.88%, while the 10-yr note yield added six basis points to 4.38%. The U.S. Dollar Index jumped 0.4% to 100.42, garnering some support from the market's expectations for the next rate cut getting pushed out to the July FOMC meeting.

• Dow Jones Industrial Average: -0.2% for the week / -3.0% YTD

• S&P 500: -0.5% for the week / -3.8% YTD

• S&P 400: +0.5% for the week / -5.6% YTD

• Nasdaq Composite: -0.3% for the week / -7.2% YTD

• Russell 2000: +0.1% for the week / -9.3% YTD

Monday:

The stock market settled in negative territory. The S&P 500 broke its extended winning streak (nine sessions) and closed 0.6% below its prior close. The index was approaching positive territory at its best level of the day, and traded down as much as 0.9%.

Selling activity was indicative of consolidation after the market's solid run off April lows. The S&P 500 exited correction territory, and closed above its 50-day moving average during the strong rally. Losses in today's session were decidedly muted compared to the scope of recent gains.

The ongoing resilience to selling efforts acted as support for stocks, along with a better-than-expected ISM Services PMI for April that helped temper recession concerns. There was also an acknowledgment by Treasury Secretary Bessent that he thinks we're very close to some trade deals.

Losses in some mega caps had an outsized impact on index performance. The Vanguard Mega Cap Growth ETF (MGK) dropped 0.7%. Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) logged a 0.3% decline.

The consumer discretionary (-1.3%) and technology (-0.9%) sectors, which house mega cap components, were among the weakest performers, along with energy (-2.0%). Dropping oil prices ($57.16/bbl, -1.20, -2.1%) after OPEC+ announced a 411K bpd increase in production starting in June impacted the energy sector.

The 10-yr note yield settled two basis points higher than Friday's settlement at 4.34%. On a related note, today's $58 billion 3-yr note auction was met with decent demand.

Reviewing today's economic data:

• April ISM Services 51.6% (Briefing.com consensus 50.2%); Prior 50.8%

  • The key takeaway from the report is that growth in the services sector accelerated in April, yet that good news was tempered by the understanding that the prices paid index conveyed inflation picking up as well with its highest reading since January 2023.

• April S&P Global US Services PMI - Final 50.8; Prior 51.4

Tuesday:

The stock market fell under selling pressure for a second consecutive session. The S&P 500 dropped 0.8% and the Nasdaq Composite logged a 0.9% decline. Consolidation efforts were among the driving factors in today's trade.

Renewed tariff concerns and cautious corporate guidance were also driving factors. Ford (F 10.44, +0.27, +2.7%) and Mattel (MAT 16.65, +0.45, +2.8%), which both reported above-consensus Q1 earnings, held off on providing full-year guidance. Ford warned that tariffs may cut $1.5 billion from its profits, while Mattel acknowledged the volatile macro-environment and said it plans to raise toy prices.

President Trump announced impending pharmaceutical tariffs, expected to be detailed within two weeks. This comes amid a U.S. trade deficit of $140.5 billion in March, driven by a preemptive surge in imports, including a $20.9 billion increase in imports of pharmaceutical preparations.

Treasury Secretary Bessent said in an oversight hearing on Capitol Hill that some trade deals could be announced as early as this week and that up to 90% of deals could be completed by the end of the year, but stocks didn't react much.

Investors will also closely monitor the Federal Reserve's upcoming policy announcement for guidance on inflation and economic growth risks related to the tariffs. The May FOMC decision is tomorrow at 2:00 ET.

Treasuries settled with gains. The 10-yr yield dropped four basis points to 4.31% and the 2-yr yield dropped five basis points to 3.79%.

Reviewing today's economic data:

• The trade deficit widened to a record $140.5 billion in March (Briefing.com consensus -$127.5 billion) from a downwardly revised $123.2 billion (from -$122.7 billion) in February. The widening was the result of March exports being $0.5 billion more than February exports and March imports being $17.8 billion more than February imports.

  • The key takeaway from the report is the surge in imports, which detracted sharply from Q1 GDP, and was highlighted by a $22.5 billion increase in imports of consumer goods that was led by a $20.9 billion increase in pharmaceutical preparations.

Wednesday:

The stock market had a mixed showing. Major indices were in a holding pattern in the early going as investors waited for the FOMC policy decision at 2:00 ET and Fed Chair Powell's press conference at 2:30 ET.

The committee voted unanimously to maintain the target range for the fed funds rate at 4.25-4.50%, which was largely expected. Market participants were hoping for more clarity about the Fed's path regarding rate cuts at Fed Chair Powell's press conference, but he maintained that policy is in a good place to allow the Fed to wait for more data.

The major equity indices had a volatile response, ultimately closing higher for the day. The Dow Jones Industrial Average rose 0.7%, the S&P 500 closed 0.4% higher than yesterday, and the Nasdaq Composite registered a 0.3% gain.

Equity indices held up well considering the disappointing price action in Alphabet (GOOG 152.80, -12.40, -7.5%) and Apple (AAPL 196.25, -2.26, -1.1%) after a Bloomberg report that Apple may shift toward using an AI search feature, which would reduce the reach of Alphabet's Google.

Many other stocks participated in upside moves. Advancers led decliners by a 3-to-2 margin at the NYSE and by an 11-to-10 margin at the Nasdaq.

The upside bias was driven in part by news of policy easing by the People's Bank of China, along with optimism about the trade war following news that representatives from the U.S. and China will meet to begin trade talks in Switzerland on May 8.

Some of the optimism around this development was tempered, however, after President Trump said that he is not open to pulling back the 145% tariff on imports from China as part of negotiations.

Late afternoon reports also indicated that the Trump administration is considering rescinding the AI chip export restrictions. This news sparked increased buying in the chipmaker space, leading the PHLX Semiconductor Index (SOX) to close 1.7% higher.

The price action in chipmakers helped boost the S&P 500 technology sector to a 0.9% gain despite the decline in Apple. The consumer discretionary (+1.0%) and health care (+0.8%) sectors were also top performers. The communication services sector was the worst performer by a wide margin due to the fallout in Alphabet.

Reviewing today's economic data:

• Weekly MBA Mortgage Applications Index 11.0%; Prior -4.2%

Thursday:

The stock market closed higher across the board. The major equity indices settled off session highs with gains ranging from 0.6% to 1.1%. The market was fueled by some pleasing developments in the trade situation, along with President Trump saying to buy stocks now.

The Trump administration announced a trade deal with the UK, fueling optimism that deals will be reached with other countries and that the tariffs may be less impactful than feared on the global economy.

Commerce Secretary Howard Lutnick said the 10% baseline tariff will remain in place (as expected), adding that the UK will purchase $10 billion worth of Boeing (BA 191.70, +6.14, +3.3%) jets.

During the Q&A with reporters, President Trump said the US is very close to making additional deals with other countries, specifying that tariffs on China "could be" lowered if this weekend's meeting goes well. Mr. Trump added he may speak with President Xi after the meeting.

Late afternoon reports indicated that the U.S. is considering lowering tariffs on China to 50% next week before long trade deal talks begin, according to the NY Post.

Treasuries faced selling pressure today, leading the 10-yr yield to settle ten basis points higher at 4.37%, and the 2-yr yield to settle ten basis points higher at 3.89%. Factors that influenced this price action included a disappointing Productivity report for Q1, which showed a larger-than-expected decrease in productivity, coupled with a bigger-than-expected increase in Unit Labor Costs.

Also, the New York Fed released its April Survey of Consumer Expectations, showing no change in year-ahead inflation expectations (3.6%) while the three-year outlook increased to 3.2% from 3.0%. The five-year outlook decreased to 2.7% from 2.9%.

On a related note, the U.S. Treasury sold $25 billion in 30-yr bonds to weak demand.

Reviewing today's economic data:

• Weekly Initial Claims 228K (Briefing.com consensus 238K); Prior 241K, Weekly Continuing Claims 1.879 mln; Prior was revised to 1.908 mln from 1.916 mln

  • The key takeaway from the report is the step down in initial jobless claims -- a leading indicator -- from the prior week, as it leaves initial claims at a level that is consistent with a fairly solid labor market and far from recession-like levels.

• Q1 Productivity-Prel -0.8% (Briefing.com consensus -0.4%); Prior was revised to 1.7% from 1.5%, Q1 Unit Labor Costs-Prel 5.7% (Briefing.com consensus 4.0%); Prior was revised to 2.0% from 2.2%

  • The key takeaway from the report is the jump in unit labor costs stemming from the weak productivity, although the first-quarter earnings reports in aggregate have not conveyed any strong profit margin pressures as a result of higher labor costs.

• March Wholesale Inventories 0.4% (Briefing.com consensus 0.5%); Prior 0.3%

Friday:

The stock market lacked excitement today, likely because it was gearing up for the excitement that promises to follow the trade meeting this weekend between U.S. and Chinese officials in Switzerland. The excitement could have either a positive connotation or a negative connotation. It will all depend on what comes out of that meeting.

There is a baseline expectation that there will be some form of de-escalation that is agreed to on the tariff front, so it would be a profound disappointment if the takeaway from this confab is no change in the draconian tariff rates each side has implemented (145% by the U.S. and 125% by China).

Press reports have suggested the Trump administration is considering a tariff rate of 60% or less to get things going here, yet President Trump wrote in a Truth Social Post before today's open that "80% tariff on China seems right! Up to Scott B."

Scott B. would be Treasury Secretary Scott Bessent, who will be joined by U.S. Trade Representative Jamieson Greer to discuss the U.S. position with China's Vice Premier He Lifeng.

The anxiousness ahead of the meeting kept the stock market in check today. There was no real conviction on the part of buyers or sellers, as this macro item overshadowed all of the earnings results since yesterday's close that included reports from the likes of Expedia (EXPE 156.66, -12.33, -7.3%), Coinbase (COIN 199.32, -7.18, -3.5%), Akamai Technologies (AKAM 76.25, -9.19, -10.8%), Cloudflare (NET 132.51, +8.20, +6.6%), Microchip Technology (MCHP 55.33, +6.19, +12.6%), and Lyft (LYFT 16.65, +3.65, +28.1%).

As one can see, there were ample and mixed reactions to these individual reports, yet the major indices had their thinking caps and price caps on ahead of the weekend trade meeting.

Seven S&P 500 sectors finished higher with gains ranging from 0.04% to 1.1%, three sectors finished lower with losses ranging from 0.6% to 1.1%, and one sector -- information technology -- finished unchanged. The biggest winner was the energy sector (+1.1%) and the biggest loser was the health care (-1.1%) sector.

Market breadth reflected the mixed disposition. Advancers led decliners by a 5-to-3 margin at the NYSE, while decliners led advancers by an 11-to-10 margin at the Nasdaq.

There was no U.S. economic data of note today.