RECAPPING LAST WEEK
U.S. equities began the week with a continuation of the relentless semiconductor led rally that
propelled all the major averages into new highs until a dramatic mid–week sector rotation
occurred. The catalyst, Broadcom’s earnings. While yet another chipmaker announcing record
earnings came as no surprise to market observers, the lack of providing forward–looking revenue
guidance that only matched rather than blowing away analyst expectations led to not just a 12.5%
drop in that stock but a rotation out of some of its high flying peers into names that drove both the
Russell 2000 and the DJIA into record highs on Thursday. U.S. Treasuries patiently awaited the
release of Friday’s U.S. non–farm payrolls report, with the long end of the curve hovering beneath
psychologically important yield levels until breaking through 4.5% in the 10 year and 5.0% in the 30
year in the immediate aftermath of the report. Job growth came in at 172k, exceeding both analyst
expectations and 100k for three months in a row while the unemployment rate held steady at 4.3%
due to an expanding labor force. The U.S. dollar rallied against major currencies as a resilient U.S.
economy, supported by a strong labor market with no prospect for rate cuts on the horizon,
contrasted against the Eurozone dealing with stagflation upon data being released that showed 1st
Quarter GDP of –.3%. The dollar rally also drove precious metal prices lower with gold and silver
making multi–week lows. Crude oil prices firmed as the market hopes for an imminent resolution
were complicated by an escalation in Israel’s conflict with Hezbollah in Lebanon. Crypto’s decline
accelerated, fueled not just by the rotation into high flying tech stocks but the revelation that
Michael Saylor’s Strategy (MSTR), one of the biggest crypto hoarders, announced a sale of $2.5M
worth of Bitcoin, apparently just to fund a distribution on it’s preferred stock, but nonetheless a
signal that added further pressure to the sector.
THE WEEK AHEAD
With a global economy and markets still digesting the effects of elevated energy prices, the market
will turn its attention to plenty of inflation related economic data this week. Sunday evening, (early
Monday in Japan), sees the release of the Japanese GDP price index and Tuesday evening sees
the release of Japanese PPI along with Chinese CPI and PPI. The Japanese Yen had been under
pressure due to their reliance on dollar denominated energy imports, with the Ministry of Finance
directing the Bank of Japan to sell upwards of $73B to support the Yen. Currency markets will be
on the lookout if intervention resumes as late Friday the USD/JPY moved firmly through the 160
level where the BOJ had been a seller. On Wednesday U.S. CPI is released followed by PPI on
Thursday, numbers which not only dashed any expectations of rate cuts upon their release last
month but firmly priced in expectations of hikes by year end. Friday offers a look at French and
German CPI, while the inflation data culminates with the release of the University of Michigan
Consumer Sentiment number along with Inflation Expectations. U.S. equity market resilience will
be tested by whether the late week selloff in chip stocks merely offers a continued rotation into
broader swaths of the market or if higher rates, energy prices, and a resumption of hostilities with
Iran all becomes a little too much. Oh, our astute readers are surely aware that there’s an IPO
expected on Friday, but that’s about all we can say.
(Schwab)
