Wall St. Turns Chipper After Nvidia Report, But Debt Ceiling Cloud Still Overhead

Debt ceiling progress remains elusive with a week to go until the “X-date” when U.S. coffers run dry, but the stock market has a mixed tone this morning thanks to chipmaker Nvidia (NASDAQ:NVDA) crushing earnings expectations and offering a booming outlook. Other semiconductor stocks joined in the excitement, helping to lift Nasdaq 100® (NDX) futures ahead of the open.

Nvidia, one of the handful of tech stocks helping drive this year’s rally in the major indexes, recently saw shares up nearly 30% after more than doubling so far this year even before its earnings report. This reflects excitement around artificial intelligence (AI), which could fuel heavier demand for chips.

There’s less excitement this morning around debt ceiling negotiations, which resumed yesterday after a pause. Fitch Ratings put on negative watch the U.S. AAA long-term foreign-currency issuer default rating. The rating agency said ongoing debt ceiling negotiations have raised the risks that the government could miss payments on some of its obligations. However, Fitch still expects a resolution before the X-date.

The market’s concerns show up clearly in short-term Treasury yields, which are at their highest levels in more than two months. There doesn’t seem to be much interest in owning these assets when it’s unclear whether they’ll be paid on time—or at all—if the country defaults.

A default still seems like a worst-case scenario and unlikely, but the mechanics of getting an agreement and then pushing it through Congress in just a few days right around the Memorial Day break seem complex. Though some Wall Street analysts suggest the Treasury Department’s June 1 deadline may be more elastic than the government says, going past that date without an agreement would likely rattle Wall Street even further.

That’s why few should be surprised by the sharp rise in volatility this week from recent lows. When volatility rises, it implies sharper possible moves each day on Wall Street.

Morning rush

• The 10 Year Treasury Yield bounced 2 basis points to 3.74%.
• The U.S. Dollar Index ($DXY) reached 104 for the first time since March 1, possibly indicating a flight to perceived safety among investors.
• The Cboe Volatility Index® (VIX) futures eased to 18.95 after topping 20 yesterday.
• WTI Crude Oil (/CL) fell to $72.94 per barrel after Russia played down the prospect of further OPEC+ production cuts at the OPEC meeting early next month.

As most risk assets stepped back Wednesday, crude oil escaped the trend and front-month /CL futures posted three-week highs above $74. This came even as copper futures (/HG) plunged to new six-month lows amid worries about industrial demand.

While all commodities likely would be vulnerable if the global economy hiccups due to potential U.S. default, crude continues marching to its own drummer for now mainly because of supply concerns. An OPEC meeting early next month is widely expected to result in another production cut after the surprise one back in late March.

Just in

Economic data just released this morning looked strong—not a good sign for those hoping the Federal Reserve might pause rate hikes in June. Weekly initial jobless were below expectations at 229,000 and the government downwardly revised the prior week’s claims substantially to 225,000 from the previous 242,000. Analysts were expecting claims of 247,000, and the weekly figure had topped 260,000 earlier this month. That’s a mouthful, but in sum, it signals a resilient labor market.

The government also raised its estimate for Q1 Gross Domestic Product (GDP) growth to 1.3% from the initial 1.1%.

Stocks in the Spotlight

Good news has been hard to find on Wall Street lately, between debt ceiling woes, wobbly earnings from many big retailers, and Fed hawkishness. So yesterday’s much surprisingly strong quarterly report from NVDA and a subsequent 15% rally in the chip company’s shares likely brought some cheer.

Nvidia easily beat Wall Street’ analysts’ earnings and revenue estimates, and also provided far better-than-expected Q2 guidance. Data center revenue rose 14% in Q1, helping ease the pain of falling year-over-year sales in the video game segment. However, video games enjoyed a 22% sequential sales improvement from the previous quarter, suggesting that the worst might be coming to a close for that struggling part of Nvidia’s business.

In its press release, Nvidia reported “surging demand” for its data center products as companies “race” to incorporate generative AI.

There’s a handful of earnings reports out this morning, including from Best Buy (BBY). The retailer’s shares rose 5% in premarket trading after it topped analysts’ expectations for earnings per share (EPS) but missed on revenue. In a press release, the company referred to “cautious” consumers.

Shares of Snowflake (SNOW) got iced, falling 13% in premarket trading after the cloud-based warehousing company’s outlook disappointed Wall Street.

Eye on the Fed

Chances of a Fed pause at the June meeting stand at 62% as of this morning, according to the CME FedWatch tool.

Minutes released yesterday afternoon from the Federal Open Market Committee’s (FOMC) May meeting show officials again contemplating a possible “mild recession” later this year. Unsurprisingly, considering all the hawkish speeches they’ve delivered recently, FOMC officials felt inflation isn’t coming down quickly enough.

Still, it sounds like at least as of the last meeting, officials were divided over the path of interest rates, with some seeing a need for more increases while others expected slowing growth to preempt the need for further action.

“Participants generally expressed uncertainty about how much more policy tightening may be appropriate,” the minutes say. “Many participants focused on the need to retain optionality after this meeting.”

To translate that from “Fed-speech,” it means they’re weighing whether to pause or raise rates in the months ahead.

Speaking of “Fed-speech,” Fed Governor Christopher Waller said yesterday he’s not clear on whether the Fed has reached its “terminal,” or peak, rate level yet based on what he sees in the economy. He added he won’t support a pause until he sees clear evidence of inflation moving toward the Fed’s 2% target, Barron’s reported.

What to Watch

Inflation up next: Friday’s April Personal Consumption Expenditures (PCE) prices reading is arguably the critical data point this week and is scheduled for before the open. 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.

Will wallets open? Prices aren’t the only data early Friday. The new day also brings a look at April Personal Income and Personal Spending, both of which are expected to rise 0.4% after being up 0.3% and flat, respectively, in March. The personal spending growth pace has dropped dramatically from a year ago when the post-pandemic economy was humming along and before inflation and higher rates took a big bite out of consumer sentiment.

Consumer check: Speaking of which, Friday also brings the final University of Michigan Consumer Sentiment figure for May. Analysts expect it to remain as soft as it was earlier this month, with consensus at 57.8 for a headline figure, according to Briefing.com. Weak sentiment often plays into lower consumer spending, putting the economy on its back foot. One positive from the initial May report that would be interesting to see follow-through on tomorrow was a slight dip in one-year inflation expectations to 4.5%, from 4.6% in April.

VIX Daily Chart

CHART OF THE DAY: WHAT’S UP. Both volatility (VIX—candlesticks) and the 10-year Treasury note yield (TNX) have risen sharply from recent lows, both on concerns about another Fed rate hike and the debt ceiling. However, the 10-year yield leveled off a bit by the middle of this week as some investors appeared to buy the underlying notes, seeking “safe havens” against a debt-related sell-off in stocks. Data source: Cboe. 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

Talking technicals: When the market dips amid uncertainty the way it is now, many investors’ eyes naturally turn to the charts for possible technical support levels that might arrest the slide in a stock or a major index. For the S&P 500 index (SPX), the first level to check is likely the 50-day moving average, now at just above 4,100. The SPX bounced off that on a downward move early Wednesday. The 100-day moving average is well below current levels, near 4,046.

Pandemic learnings apply: One thing to remember, though, is a lesson many learned in March 2020 at the height of the pandemic sell-off. At that time, when the uncertainty dial turned up to near all-time highs and volatility reached levels unseen since 2008, those moving averages and other support lines on various technical analysts’ charts didn’t end up meaning much. The major indexes fell through them like the coyote falling off a cliff in the old cartoon. In other words, don’t count on technical “support” to come to the market’s rescue this time, either, if the worst happens and the United States defaults—as unlikely a scenario as that may be. This isn’t to suggest the market’s going to make a little hole in the ground far below with smoke rising from it. Only that buyers may be harder to find, especially if volume remains low, and that generally means stocks tend to fall farther before finding interest.

Musical chairs: As debt ceiling-related selling continued Wednesday, a pattern seemed to develop in which investors shied away from “risky” areas of the market like semiconductors—which had been rallying fiercely—even as they embraced big-tech stocks like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). That didn’t mean those two mega-caps rallied—they didn’t. They just had a steady day or fell less than many of their tech peers, suggesting investors clung to shares of AAPL and MSFT as potential ports in a storm. No stock investment is truly safe, naturally, but at times like these investors might be looking for the biggest stocks with the heaviest wallets. Also, exposure to non-U.S. markets might be an attraction at a time when the U.S. risks default, and these firms have major overseas businesses. At the same time, defensive sectors like staples and utilities got a big this week after being out of favor over the last month. Health care companies Merck (MRK) and Eli Lilly (NYSE:LLY) also ended in the green Wednesday.

Calendar

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 Purchasing Managers’ Index, April Job Openings and Labor Turnover Survey (JOLTS), and expected earnings from Advance Auto Parts (NYSE:AAP).

June 1: May ISM Manufacturing Index, April Construction Spending, expected earnings from Dollar General (NYSE:DG) and Hormel Foods (NYSE:HRL).

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.