Will Powell Destroy S&P 500 Rally?

Wall Street bulls are becoming much more optimistic about a resolution in Washington regarding the debt ceiling. This helps lift one of the dark clouds that has been hanging over our head.

Interest Rates

On the flip side, bears are pointing to a less optimistic view about China’s recovery and a bit more worried that the Fed is going to stay more hawkish than some might have anticipated. Investors are again heavily debating the Federal Reserve’s next move as more officials raise doubts about a “pause” in June. Dallas Fed President Lorie Logan and St. Louis Fed President James Bullard yesterday both said they did not think inflation was coming down fast enough to justify pausing the Fed’s rate hiking campaign, echoing sentiments expressed by several other colleagues this week.

Bullard actually said that the slow pace of decline “may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control.” Still, a majority of Fed officials that weighed in this week have endorsed pausing rate hikes at the June 13-14 meeting, with many of them noting the risk of raising rates too much too fast.

That has also been a key concern on Wall Street, particularly amid tightening credit conditions stemming from the banking turmoil that began in March.

Both the Fed’s tightening tools and tighter bank lending impact the economy with a pretty long lag of anywhere from 3 to 6 months, or more. Many Wall Street economists argue that the greater risk now is not rising inflation but rather a severe credit crunch that could grind economic growth to a halt and possibly usher in a severe recession.

Investors are highly anxious to hear the thoughts of Fed Chair Jerome Powell today, who has previously stated his belief that tighter bank lending will likely cool the economy and help slow inflation back to the Fed’s +2% target.

Data to Watch

The next critical inflation update will be the PCE Prices Index next Friday. The headline rate for March slowed down to +4.2% from +5.1% previously. However, the Fed’s preferred “core” rate, which strips out energy and food, held fairly steady at +4.6% versus +4.7% in February. That’s also exactly where the gauge stood in December, meaning it could be argued that the Fed’s moves have had little impact on inflation this year outside of keeping it level.

There is no significant economic data due today and the calendar for next week is fairly light. Aside from PCE Prices on Friday, investors will be digesting New Home Sales on Tuesday; the second read on Q1 GDP and Pending Home Sales on Thursday; and Durable Goods Orders and Consumer Sentiment on Friday.

On the earnings front, the highlight today is Deere and Co. Next week brings several more key results with the biggest highlight being NVIDIA on Wednesday. Other releases include Zoom on Monday; Auto Zone, BJ’s Wholesale Club, Intuit, Lowe’s, and Palo Alto Networks on Tuesday; Analog Devices and Snowflake on Wednesday; and Best Buy, Burlington Stores, Costco, Deckers Outdoor, Dollar Tree, Medtronic, and VMware on Thursday.

Investors next week will also be hoping for a resolution to the debt ceiling standoff in Washington ahead of the approximate June 1 deadline to avoid a possible US debt default. House Speaker Kevin McCarthy yesterday said he hopes to hold the first vote in his chamber next week… stay tuned.