Equity and fixed income markets traded marginally lower this week as improving inflation and better-than-expected corporate earnings were overshadowed by concerns surrounding a timely resolution of the impending debt ceiling crisis. Both the S&P 500 and Dow Jones Industrial Average indices declined, by -0.24% and -1.04%, respectively. Growth stocks continued to edge higher with the NASDAQ Composite up 0.44%. Within fixed income markets, the Bloomberg US Aggregate Bond Index fell by -0.23% as long-term Treasury bonds traded in a narrow range.1
The Consumer Price Index rose 0.4% in April on a seasonally adjusted basis, after increasing 0.1% in March, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the All-Items Index increased 4.9%, slightly better than analysts’ expectation of 5%, and the smallest 12-month increase since the period ending April 2021. The index for all items less food and energy, or “core” CPI, rose 5.5% over the past 12 months, with the Shelter Index increasing 8.1% over the last year , reflecting its “sticky” nature.2
While the CPI showed continued improvement, early signs of moderation in labor markets became evident. The Job Openings and Labor Turnover (JOLTs) report indicated that the number of job openings decreased to 9.6 million, the lowest reading since the peak of 12 million in March 2022.3 While the US non-farm payroll data showed a solid +253,000 month-on-month increase in new jobs in April, this was lower than the average monthly gain of 290,000 over the prior 6 months. In addition, there were notable downward revisions to prior months, while temp-help employment (a leading indicator) declined again. The U.S. unemployment rate fell to 3.4%, while the participation rate was flat at 62.6%. However, average hourly earnings were robust, up +0.5% m/m and 4.4% y/y.4 This reacceleration in wages might be of concern to the Fed.
To date, 92% of the companies in the S&P 500 have reported earnings for Q1/23. Of these, 78% have reported actual EPS above the mean EPS estimate, which is above the 10-year average of 73%. It is also the highest percentage of S&P 500 companies reporting a positive EPS surprise since Q3/21 (82%)5. However, one can argue that the bar had been set low, allowing companies to manage their costs and post earnings declines that were better than expected. Looking ahead, fewer companies are providing forward-looking guidance, and those that have are seeing limited revenue growth, possibly anticipating an economic slowdown, or even a recession.
Despite these positive trends, financial markets have shifted their focus to the uncertainty surrounding the impending debt ceiling negotiations between the House and Senate. Treasury Secretary Yellen indicated that the US had reached the statutory limit of its outstanding debt, totaling $31.3 trillion, in January and that it had implemented extraordinary measures. These stop-gap measures are expected to be exhausted by June, at which time the government would no longer be able to satisfy its obligations unless Congress raises or suspends the debt limit6. Unfortunately, given the political polarization that currently exists, there is no guarantee that this issue will be resolved unless significant concessions are made by both political parties.
Footnotes:
- Morningstar Direct
- https://www.bls.gov/news.release/cpi.nr0.htm
- https://www.bls.gov/news.release/jolts.nr0.htm
- https://www.bls.gov/news.release/empsit.nr0.htm
- https://insight.factset.com/sp-500-companies-reporting-positive-eps-surprises-for-q1-see-below-average-price-increases
- Department of the Treasury, January 13th and May 1st correspondence to the Speaker of the House.