Morning Seeds • 05/26/2023 - 9:20 AM EST
Artificial Intelligence
AI Enthusiasm Drives Equity Strength
After two days dominated by debt ceiling fears and de-risking, AI enthusiasm took over and motivated a high-dispersion day in stocks. On the back of NVDA gaining 24% on its earnings report, the tech heavy NDX drove the broader market higher even without a debt ceiling agreement (although the tone of negotiations has improved). The Nasdaq composite was up +1.71% while the SPX was up +88bps. The strength in semiconductors helped the NDX and the Morgan Stanley cyclicals vs defense index attain one-month highs. Staples and utilities, typically defensive sectors, lagged and have now given up the gains of March and April. Further, high vol and high beta names also struggled yesterday. Rates moved higher as well with 2yr and 10yr rates continuing to revert toward the pre SVB highs. While AI has been a dominant theme all year, the NVDA earnings report has taken the enthusiasm to new highs.
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China
China Stimulus Rumblings
Markets were quieter in China overnight with Hong Kong closed but data and sentiment remain poor. On the back of this, we perceive growing calls among market participants and rumors – perhaps errant – of needed stimulus. On the one hand, Chinese bonds continue to rally with growth weaker and calls on the PBOC to loosen conditions further and/or cut rates. There have also been rumors of fiscal stimulus (presumably infrastructure-focused), which would be a reversal of widely circulated policy preferences of Xi Jinping. While this may prove to be closer to fantasy than reality, we would note that (a) both the real-time data and sentiment in China have soured sufficiently to support this mentality and (b) that these rumors are unlikely to suddenly dissipate, making it more difficult to trade bearish China sentiment. Separately we would note the uneventful and vaguely constructive bilateral meeting between China and US commerce secretaries in DC and continue to watch for a “thaw” (Biden’s term) that might materialize via other face-to-face meetings.
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debt
Big Deal Weekend
The general contours of and atmosphere for a negotiated debt ceiling deal appear to be imminent. Biden and McCarthy appear to have largely agreed on two years of discretionary spending caps in exchange for a lift in the debt ceiling to the other side of the ’24 election. Still up in the air are specifics around energy permitting reform (and the potential inclusion of transmission balancing which Democrats may require) and whether or not work requirements may be expanded within certain benefits programs. How these land will depend on the next phase of execution here which is whipping the votes to deliver this – specifically whether there will be more Republican or Democrat votes in the House for an eventual bill. This will be the plot of the drama next Tuesday and Wednesday as the June 1 putative deadline looms and uncertainty on this front may limit immediate term market relief from a deal-in-principal announcement. We expect the other side of the long weekend to feature a discussion of whether there is time past June 1 to deliver a deal; the bills market appears more focused on June 6 than June 1. We think it would be more likely that Yellen’s Treasury can find the means to extend a few days than that congress would do something ultra-short term to buy itself a few more days. In either event, we view flimsy deadlines as a tactical concern.
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Recession
Recession Fears Receding
Over the past several days, market threats that were top of mind for many market participants appear to be dwindling. Yesterday, the treasury announced bills that will settle on June first, signaling to the market that the treasury does not appear to view June 1st as an imminent X-date. Meanwhile, claims data was revised down yesterday, painting a stronger employment picture, while GDP was revised higher and corporates have posted stronger than expected earnings. In combination, this data illustrates a healthier than expected market that is not barreling toward recession. Further, an Atlanta Fed Survey released yesterday revealed the “credit crunch” has not barred major players from gaining access to capital due to an excess of cash. While there has been a tightening of lending standards, creditor seekers appear to be businesses hoping to expand rather than those chasing credit for survival. PCE this morning came in slightly higher than strategist’s expectations at 0.4% and higher than last month’s print of 0.3%. Core services ex-housing have held steady across months, a signal that inflation continues to remain elevated. Stronger data continues to put pressure on valuations in bond-land which have been pricing in eases during the second half of the year. Recent strength in economic indicators and inflation will likely increase the odds of a rate hike during next month’s meeting.
Featured
The Pomp Podcast - Jordi Visser On The Intersection Of Bitcoin, AI, Debt Limit, & Banking Crisis [PODCAST]
Weiss's President and CIO, Jordi Visser, joined Anthony Pompliano on The Pomp Podcast to discuss a wide array of topics covered in his most recent research paper titled SVB, ChatGPT and the Future of Trust: The Bitcoin Moment. Anthony and Jordi’s discussion covers the intersection of bitcoin, artificial intelligence, debt limit and the banking crisis. They also dive into why investors should be more focused on innovation, advice for young people, Jordi’s unique approach to reading and so much more.
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