In a week devoid of market-moving news, the S&P 500 continued what some are calling a breakout rally. The index is closing less than 1% below the all-time high of 4325 touched last August. The rally is surprising given that the Fed Funds futures market is anticipating at least one more rate hike by the Fed. The Fed has been in their quiet period this week, so traders were forced to speculate on what may have changed in their thinking. As we closed out the week last Friday, Fed speakers seemed divided on another rate hike at the June meeting. They are going to be challenged to make a snap decision as the CPI index for May is released on the morning of their first day of deliberations.

The headline economic report this week was Retail Sales and, for the most part, it told the story of a resilient consumer. The headline result rose 0.4% over the March reading, which you may recall was an abysmal -1.0%, month-over-month. March’s outcome was revised to a simply dreadful -0.7%. On balance, the market ignored the data, choosing instead to obsess about the debt limit impasse. Treasury Secretary Yellen reiterated her concern that the U.S. would default as soon as June 1st if an agreement to raise the ceiling isn’t reached before then. The Treasury Bill market has priced in a default, with early June Bill maturities offering a yield-to-maturity of as much as 5.5%, more than 0.50% higher than Bills maturing a month later. Ironically, the rest of the yield curve, as well as the stock market are trading as though an agreement of the ceiling will be reached. We agree that a deal is most likely to be reached and the market will again return to trading on fundamentals, but as we get closer to the drop dead date, we expect that volatility will rise.

The first look at Q1 GDP offered something for everyone. The headline number presented quarter-over-quarter growth of 1.1%, below the expected 1.9%. The obvious takeaway is that economic activity is weakening as the U.S. slowly slips toward recessionary territory. But we would argue that, while that may be true, activity in Q1 was not as bad as that first look. The BLS measures GDP on a quarter-over-quarter basis, which makes no sense, as the final quarter of the year is always the most robust. To adjust for that, the BLS seasonally adjusts the number to achieve a smoothing effect. We prefer, instead, to compare the economic activity on a year-over-year basis. From that perspective, Q1 GDP registered 1.6% over the GDP reported for Q1 2022 – Better than the reported Q/Q 1.1% headline. However, Q1 2022 grew 3.7% over Q1 2021.