By Joseph Adinolfi and Steve Goldstein
The Dow gained 350 points on Friday, unwinding some of its losses from a five-day streak of declines, as the latest batch of U.S. economic data offered healthy readings on the state of U.S. consumption and manufacturing.
Stocks shrugged off signs of stronger-than-expected inflation in April which had sent short-dated Treasury yields higher as expectations rose for another interest-rate hike from the Federal Reserve in June.
What’s happening
On Thursday, the Nasdaq Composite posted its biggest gain in three weeks thanks to a historic rally in shares of chipmaking giant Nvidia Corp. The Dow Jones Industrial Average, meanwhile, finished lower for the fifth straight session.
What’s driving markets
A raft of encouraging U.S. economic data helped catapult U.S. stocks higher early Friday, as the blue-chip Dow unwound some of its losses from earlier in the week that had been driven in part by recession fears.
PCE data also showed consumer spending sprang back to life in April, rising 0.8%, the largest gain in three months, surpassing expectations for a 0.5% increase as Americans bought more cars and spent more on services.
Durable-goods data showed orders for U.S. manufactured goods jumped 1.1% in April The gain was largely driven by military spending, but business investment rose sharply as well.
At the same time, the PCE price index showed core inflation rose 0.4% in April, more than the 0.3% increase that economists had expected. Core inflation strips out volatile food and energy prices. The yearly increase in prices rose to 4.4% from 4.2% in the prior month.
But traders were willing to overlook slightly hotter-than-expected inflation due to signs that the U.S. economy looks robust. Updated GDP data released earlier this week showed the U.S. economy grew by 1.3% during the first quarter, more robust than previous estimates had suggested.
Yields on short-dated Treasury yields climbed on Friday thanks to the inflation data, with the 2-year yield BX:TMUBMUSD02Y up 8 basis points at 4.580%. Fed funds futures traders now see a 54% chance of a June hike following Friday’s inflation data, according to the CME’s FedWatch tool.
Rubeela Farooqi, chief U.S. economist at High Frequency Economics, noted that inflation appeared to be moving “in the wrong direction” at the start of the second quarter.
Stocks also continued to benefit from follow through from a surge in technology stocks on Thursday that was driven by Nvidia’s (NVDA) optimistic, artificial intelligence-fueled outlook for sales in the second quarter.
Nvidia’s shares also rose more than 24%, with the company adding nearly $200 billion to its market capitalization, one of the biggest one-day increases in the history of corporate America.
On Friday, another microchip maker, Marvell Technology (MRVL), was rising after saying AI has emerged as a growth driver.
Reports suggesting that Congress was close to a deal to raise the U.S. debt ceiling also helped sentiment, though House Republicans have already left Washington ahead of the U.S. Memorial Day holiday weekend.
While Treasury Secretary Janet Yellen says the U.S. could run out of money as early as June 1, other projections estimate the federal government may have until the middle of the month.
“I think we’ll all be able to exhale by mid-June, although it will likely be an increasingly volatile market environment between now and then,” said Kristina Hooper, chief global market strategist at Invesco. “Once that drama recedes, I think all eyes will be back on central banks.”
-Joseph Adinolfi
Companies in focus
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05-26-23 1049ET
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