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“Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.” – Albert Einstein

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Futures are off their lows of the morning and trading in positive territory on reports that negotiators in Washington are close to a deal on the debt ceiling that could be voted on next week. Throughout this whole saga, there have been several false alarms, so some healthy skepticism is warranted. Ultimately, the debt ceiling will be raised and this whole charade will be out of the headlines until it comes up again in a couple of years.  Next up for the markets is dealing with the surge of issuance that will follow in the coming months.

In the near term, Fridays are likely to get a lot quieter in the coming months, but even though we’re heading into a holiday weekend, there’s still a lot of economic data on the calendar with Personal Income, Personal Spending, PCE, Wholesale Inventories, Durable Goods, and Michigan Confidence.  Buckle up. Get ready. And enjoy the first weekend of summer.

Regarding the current state of the market, the picture on the surface looks the opposite of what’s going on below the surface.  Starting with the S&P 500, after hitting a high for the year last Friday, stocks have experienced a bit of a pullback this week.  If it weren’t for NVIDIA (NVDA) on Thursday, the S&P 500 would probably be heading into today on a four-day losing streak.  Still, as shown in the chart of SPY below, we’re only a little more than 1% from the high price for the year, so at this point, the pullback looks like nothing more than a scratch.

At the sector level, though, the picture looks nothing like it does at the index level. Just two sectors are up since last Thursday’s close, and the remaining nine sectors are all down over 1% with five of them down over 2.5%.  Not only that but six sectors are trading at oversold levels.  The fact that most sectors are oversold, and only three sectors are above their 50-day moving average (DMA) isn’t the picture you would think of if someone told you that the S&P 500 was 1% from its high for the year.

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“The age of AI is in full throttle.” – Jensen Huang

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The above quote from NVIDIA (NVDA) CEO Jensen Huang wasn’t from last night’s conference call, but the keynote speech of the company’s GTC conference in 2020 – three years ago.  If AI was in full throttle back then, where is it now?

While we’ve been on recession watch for the US economy, this morning, we got news that the German economy has now moved into recession territory as Q1 GDP was revised to a decline of 0.3% following Q4’s contraction of 0.5%. Despite the recession in Europe’s largest economy, ECB policymakers are out this morning calling for more rate hikes to combat rising wages. Equity markets in Europe are lower across the board, but only fractionally.

In the US, the debt standoff continues, and Fitch weighed in this morning by placing the AAA rating of US debt on credit watch for a possible downgrade.  It’s been a busy morning for economic data, including GDP, jobless claims, Personal Consumption, and Core PCE, and they all came in higher than expected except for jobless claims which were both lower than expected.  All of these reports suggesting stronger-than-expected growth aren’t good if you’re hoping for the Fed to pause, but as of now, futures haven’t reacted much.  Dow futures are lower while Nasdaq futures are surging thanks to the surge in NVDA.

The overnight move in NVDA reminds us of the Lenin quote, “There are decades where nothing happens; and there are weeks where decades happen.” Words really can’t describe the move in NVDA overnight.  While the company has been public for well over 20 years now, a quarter of its entire market value has come in the last 17 hours!

With the stock trading up over 27% in the pre-market, it isn’t on pace to be the best performer in reaction to earnings this season.  However, it would be just one of 18 (out of thousands of stocks that have reported) to rally 25% in reaction to its earnings report.  What is remarkable, though, is how NVDA’s market cap compares to the other stocks that have surged 25% in reaction to their earnings reports.

As shown in column four of the table below, NVDA had a market cap of $755.24 billion before reporting earnings yesterday.  Of the 17 other stocks that rallied over 25% in reaction to earnings, none has a market cap of even $10 billion, and those market caps include the impact of the 25%+ move.  At the opening today, NVDA will have a market cap of closer to a trillion! The combined market cap of the 16 other companies that rallied 25% in reaction to earnings is $27 billion, but this morning alone, NVDA’s market cap will increase by more than 9 times that.

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“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” – John Maynard Keynes

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You may be looking at the drop in futures and think that there has been some bad news regarding the debt ceiling.  Since there has been no breakthrough agreement on that front, the lack of progress is probably playing a partial role, but the real culprit appears to be the hotter-than-expected inflation reading in the UK.  That report has both the FTSE 100 and Europe’s STOXX 600 down sharply and trading below their 50-day moving averages.

Here in the US, investors will continue to watch DC for signs of where negotiations over the debt ceiling are going, but other than the Fed Minutes at 2 PM, there are no significant economic data releases on the calendar, so given that European stocks have been leading things lower, it will be hard for bulls to make any headway while those markets remain open for trading.

Getting back to the UK inflation report, economists were forecasting headline inflation to rise 8.2% which would have been a nearly two-percentage point decline relative to March’s reading of 10.1%.  The actual reading, however, came in 0.5 percentage points higher at 8.7%.  Outside of the last year when every other reading was higher than April’s, it was the highest y/y reading since May 1982 and came up just shy of falling below the peak of 8.4% from June 1991.  If there could ever be a way during a period when high inflation was the market’s major concern that a 52-week low reading in inflation would not be considered a good thing, this was it.

Regarding the UK, we wanted to look at how UK stocks have performed relative to the US over the long term.  Even though it’s spring, the first thing that comes to mind is skiing.  The chart below shows the relative strength of the MSCI United Kingdom ETF (EWU) versus the S&P 500 SPDR ETF (SPY) over the last ten years. For much of this period, it has been a straight downhill for UK stocks relative to the US.  Over the last two years, though, the slope has flattened out, and the two ETFs have essentially performed in line with each other (lower chart).  While bulls on international stocks may be hoping the last two years have been the early stages of a base to rally from, more inflation prints like today’s could signal more downhill ahead.

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