As Debt Ceiling Talks Wobble, Investors Look To May Fed Minutes, Nvidia Earnings For Direction

(Wednesday market open) Investors seeking distraction from the ticking debt ceiling countdown clock get some this afternoon in the form of Federal Reserve meeting minutes and Nvidia NVDA earnings.

Ahead of that, major indexes resumed their decline in premarket trading Wednesday after media reports cited little progress in Washington, D.C. One question is whether the business community might step in soon to put pressure on politicians to stave off default. Bloomberg reports that the White House and House Republicans will resume debt ceiling negotiations today.

Volatility woke up Tuesday after a long nap. Debt ceiling fears likely switched off the snooze button, and choppiness might continue until there’s a debt ceiling solution. The Cboe Volatility Index® (VIX), sometimes called the “fear index,” jumped to 19.6 early today, the highest since May 5.

“If the debt ceiling issue isn’t resolved, then the U.S. risks another debt downgrade and a sharper rise in short-term rates, while risk assets might sell off as they did during the 2011 debt ceiling standoff,” says Kathy Jones, Schwab’s chief fixed income strategist.

Yesterday’s selling, which clipped the high-flying (and rate-sensitive) info tech sector, could be an opening salvo if this deadlock continues. Defensive parts of the market finished near the top of the leaderboard Tuesday, possibly a sign of investors seeking “safe havens,” though no investment is truly “safe.”

Morning rush

• The 10-year Treasury note yield (TNX) slipped 2 basis points to 3.67%.
• The U.S. Dollar Index ($DXY) climbed to 103.58.
• The Cboe Volatility Index® (VIX) futures traded at 19.6, well above recent lows below 17.
• WTI Crude Oil (/CL) rose to $74.04 per barrel after a larger-than-expected U.S. supply drop and Saudi comments that raised concerns about another possible OPEC output cut early next month. 

Just in

U.K. inflation fell last month to 8.7%, the lowest since March 2022 but still above analysts’ expectations. Core inflation actually rose and now stands at 6.8%—the highest since 1992 and well above the Bank of England’s (BoE) 2% goal.

Here at home, mortgage applications fell for the second straight week amid high rates.

Stocks in the Spotlight

Earnings roll: The late-season earnings calendar rolls on this afternoon with Nvidia (NVDA) and continues Thursday with Costco (COST), Dollar Tree (DLTR) and Best Buy (BBY). Here’s a run-down of what’s ahead:

NVDA: Shares have more than doubled this year, even though NVDA reported a 21% revenue drop in its fiscal Q4. Analysts expect a similar year-over-year revenue decline and a sharp earnings decline in fiscal Q1. Excitement over Artificial Intelligence (AI) is one factor driving shares, and investors also seem enthused by NVDA’s teaming up on AI technology with software and hardware companies like Microsoft MSFT and Dell DELL. Watch for any updates on the impact of AI demand on the data center outlook, and also for the latest on the video gaming business. There are signs that gaming demand might be on the upswing after a long slump that hurt NVDA’s graphics processing chips sales.

DLTR: It’s been a tough year for retail sector stocks, which are basically flat now since December 30.  Going against the grain are some of the discount retailers, including Walmart (WMT) and DLTR, where performance has far outpaced the overall sector. This likely reflects more people gravitating toward discount stores as they fight to out-maneuver inflation, as well as what’s on the shelves as people look to stock up on “staples” rather than “want-to-have” items. DLTR shares are up about 12% this year, a stronger performance than the SPX. Last time out, DLTR topped analysts’ expectations and set Q1 revenue guidance at between $7.2 billion and $7.4 billion.

COST: ”Staples” certainly fill shopping carts each day at COST, but investors haven’t been rushing for “membership” in COST shares so far this year. Shares are down since their 2023 peak in early February. That’s despite April’s 1.4% rise in same-store sales after a 1.1% decline in March. COST did well in the food aisle last month, the company said, but, like a lot of retailers, saw interest in “discretionary” items like electronics and jewelry diminish. Net sales also fell month-over-month in April despite the same-store sales increase. In COST’s last earnings report, fiscal Q2 earnings beat analysts’ estimates, but shares fell as revenue came in lighter than Wall Street had expected. Keep an eye this time on COST’s private-label food sales, a possible advantage for the company as consumers look for bargains.

Kohl’s (KSS) shares jumped more than 12% in premarket trading after the retailer surprised Wall Street by reporting a profit in its latest quarter. Shares of the company remain well below the 52-week high, but some analysts see this report as a sign of improvements taking hold under a new CEO, Bloomberg reported.

Shares of vaccine makers Moderna MRNA and BioNTech BNTX were up over 8% on Tuesday after a senior health adviser in China warned that Omicron variant XBB “has been fueling a resurgence” of COVID-19 cases across China since late April and is expected to result in 40 million infections a week, according to a Bloomberg report. Shares of other publicly traded stocks with exposure to the COVID vaccine market also advanced after the report, including Novavax NVAX, Eli Lilly LLY and AstraZeneca AZN.

Eye on the Fed

Chances of a Fed pause at the June meeting stand at 65% as of this morning, according to the CME FedWatch tool. Minutes from the last Federal Open Market Committee (FOMC) meeting are due out at 2 p.m. ET and may give insight into what sort of support a possible rate hike pause might have among FOMC officials.

Today also features a 12:10 p.m. ET speech from Fed Governor Christopher Waller on the economic outlook. Waller sounded hawkish when he last talked publicly about the economy in April, saying, “Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” according to MarketWatch.

The question is whether Waller echoes the somewhat more dovish tone taken last week by Fed Chairman Jerome Powell or doubles down on some of the more hike-friendly talk heard earlier this week from other Fed officials. Investors will likely pay close attention to anything he says about a possible June pause, if he addresses the topic.

What to Watch

30,000-foot view: The government’s second estimate for Q1 Gross Domestic Product (GDP) is due out early Thursday, providing a broad view of the economy. The first estimate came in at 1.1%, a relatively tepid reading. It’s unusual to see any big changes in the second estimate, and indeed analysts expect it to stay right where it is at 1.1%, according to consensus gathered by Briefing.com.

Inflation update: Friday’s April Personal Consumption Expenditures (PCE) prices reading is arguably the critical data point this week and is scheduled for before the open that morning. It’s the inflation metric watched most closely by the Fed. Analysts expect headline and core PCE prices to rise 0.3% in April, compared with 0.1% and 0.3%, respectively, in March, according to Briefing.com. The core data strips away volatile energy and food prices.

Talking technicals: Yesterday’s 1% drop in the S&P 500® index (SPX) took it below the key range of 4,150 to 4,170 that had formed a band of resistance on the charts earlier this month and which it only briefly topped last week. The 4,200 level appears to continue to pose a challenge. The SPX topped it several times intraday, most recently on Monday, but failed to close above it on any of those days.

CHART OF THE DAY: WORKING WITHOUT A NET. The S&P 500 index (SPX—candlesticks) fell 1% yesterday but remains well above both its 50- day (blue line) and 100-day (red line) moving averages. As investors might remember from the pandemic, the moving averages aren’t guaranteed levels of support in a major selloff, so if debt ceiling worries persist and the market swoons, don’t necessarily count on help from those lines on the chart. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Recession winds easing? Market participants have recently scaled back ideas of possible Fed rate cuts for later this year, with fed funds futures now pricing in the likelihood of one to two cuts by December versus two to three cuts a month ago. It’s easy to say this is due to recent hawkish Fed talk, but that’s not entirely accurate. Near-term rate hike odds are more closely anchored to Fed speeches, as is the 2-year Treasury note yield—up precipitously over the last two weeks. Longer-term interest rate probabilities likely better reflect how investors see the economy shaping up over time. The takeaway from this double-hinged scenario on rates could be that investors see less chance of a steep recession later this year that would require dramatic rate cuts. While higher yields and longer-term rates closer to current levels may sound bearish, perhaps there’s a bullish story buried below if fewer or no rate cuts go along with the economy avoiding a major downturn.

Economic ceiling: The 10-year Treasury note yield, which had climbed sharply to two-month highs by early Tuesday, pulled back later in the day and eased further early Wednesday. This could potentially represent investors starting to pile into an asset sometimes thought of as a “safe haven,” but also might reflect ideas that any deal Congress and the president reach might slow government spending, possibly leading to less economic growth. U.S. government spending can be a potent tailwind not only for the overall economy, but for many companies that enjoy lucrative government contracts. Defense industry shares weakened recently, though correlation isn’t necessarily causation.

If you build it…: Can’t find what you want on the market? Build one yourself. That seems to be the theme for housing. Existing home sales are slumping amid inventory tightness while new home sales for April reached their highest seasonally adjusted levels in more than a year. Sales of new U.S. single-family homes rose 4.1% month-over-month to a seasonally adjusted annualized rate of 683,000. The median price was $420,800, in April, while the average price was $501,000, compared to $458,200 and $562,400 respectively a year ago. This could suggest new home builders might be accelerating sales through discounts amid high mortgage rates, and that more buyers are gravitating toward cheaper homes. Both developments could spell possible negative margin ramifications for home-building companies. Home builder Toll Brothers TOL reported strong quarterly results late yesterday—including growth in margins—and in its press release cited improved buyer confidence. The company holds its investor call this morning, so look for more possible housing insights there.

Calendar

May 25: Q1 GDP second estimate, April Pending Home Sales, and expected earnings from Dollar Tree (DLTR), Costco (COST), and Best Buy (BBY).

May 26: April Personal Consumption Expenditures (PCE) prices, April Personal Income and Personal Spending, April Durable Orders, Final May University of Michigan Consumer Sentiment.

May 29: Memorial Day – markets closed.

May 30: May Consumer Confidence.

May 31: May Chicago PMI, April JOLTS job openings, and expected earnings from Advance Auto Parts (AAP).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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