MARKET COMMENTARY

Here are the economic and market highlights for the week: 

• The Federal Reserve announced it would hold rates steady at a range of 5.25% to 5.50% citing a “lack of further progress” in bringing inflation back down toward its 2.00% goal. Recent data has signaled a reacceleration in inflation since the start of the year, justifying the Fed’s wait-and-see approach, but encouraging the central bank to maintain its dovish tilt. Chairman Powell eased investor concerns, saying he does not expect the Fed’s next move would be a rate hike, but left open the question of whether we’ve seen the peak rates for the cycle. The Fed handed investors another reason for optimism by voting to slow the pace at which it allows maturing bond proceeds to roll off its balance sheet without reinvesting them beginning in June. The move is seen as a slight easing measure that should help alleviate the recent upward pressure on bond yields.
• U.S. jobs growth slowed in April to 175K, well below the 240K estimate. The unemployment rate also ticked higher to 3.90% from 3.80% the previous month. April’s jobless rate tied for the highest level since January 2022. Importantly, as it relates to inflation and rate cuts, average hourly earnings rose a more modest 0.20% for the month and were up 3.90% from a year ago.
• The ISM Manufacturing Index fell into contraction territory in April, declining to 49.2 from 50.3 in March. Numbers above 50 indicate expansion while numbers below signal contraction. New orders slipped 2.3 points to 49.1 in April while employment jumped 1.2 points to 48.6 as businesses ramped up hiring to meet future demand. In a troubling sign for inflation, the prices index rose to 60.9, a 5.1 point increase from the previous month. The ISM Services Index also slowed sharply in April to 49.4 from 51.4 in March. That was the first drop into contraction since December 2022. A drop in production, new orders, and employment were a drag on the headline number. Inflation also remained sticky at the services level with the price index up 5.8 points to 59.2. 

Markets Cheer Dovish Fed and Strong Earnings 

Stocks posted a second winning week, breathing a sigh of relief that the Fed did not posture more aggressively following this week’s FOMC meeting despite a reacceleration in inflation year-to-date. The Fed, and Powell more specifically, continue to believe that the balance of inflationary factors is still to the downside. During his press conference, Powell cited his continued belief that the current level of rates has yet to be fully realized by the economy. He pointed to both a slowdown in hiring, a decline in the number of workers voluntarily quitting their jobs and slowing rental rates as evidence, noting that these have yet to make their way into current inflation measures. The April jobs report released on Friday validated that view by showing a sizable decline in hiring. Stocks jumped on Powell’s post-FOMC comments with the Dow Jones Industrial Average rallying as much as 500+ points at its peak for the day. That helped lift the major indices after a tough April for both stock and bond investors. The Dow fell 5% for the month while the S&P 500 and Nasdaq Composite Index each posted losses of more than 4%. Market sentiment has turned strongly positive so far in May with both the Fed’s statement and April jobs report aligning, keeping a late 2024 rate cut a possibility.

Macro factors were not the only items investors were keeping an eye on this week. Amazon and Apple’s earnings were also on tap, and they delivered. Amazon reported better-than-expected earnings while Apple announced a surprise $110 billion share buyback, the biggest buyback in U.S. history.

May is off to a positive start after a choppy April during which inflation accelerated and the prospect of rates remaining “higher for longer” took its toll on investor psyche. Last week’s CPE report presented the investors with a new possibility – one in which peak rates have not been reached and may need to go higher. When presented with the prospect of more hikes or “higher for longer”, the latter suddenly looks far more palatable – particularly when cast in the context of an optimistic Fed.  It helped that both the jobs and ISM reports tucked nicely into the Fed’s narrative, helping restore investor confidence in the Central Bank as well. In a word, markets traded on relief this week – relief that all is not lost for a rate cut in 2024.

The Week Ahead

Next week, we will take a look at the following data: 

• Consumer Sentiment
• Wholesale Inventories

Kentucky Derby Celebrates 150 Years 

It will be a day of big hats and high stakes tomorrow at the “Run for the Roses,” the annual Kentucky Derby at Churchill Downs. It’s an event that is known as the most exciting two minutes in sports. It’s also the oldest continuously held sporting event in the country. The first Kentucky Derby was held in 1875, making this year’s race the 150th anniversary.

The Kentucky Derby is where a Thoroughbred horse begins its quest for the coveted title of Triple Crown winner. To win the title, a horse must win the Kentucky Derby plus the Crown’s two other jewels, including the May 18th Preakness Stakes in Maryland and the June 8th Belmont Stakes in New York. Getting to the Derby involves a tiered point system in a series of designated races at tracks across the country and around the world leading up to the first Saturday in May each year. The race is limited to Thoroughbred horses who are three years old. Points are awarded to the top four finishers in each of the qualifying races. The 20 horses with the most points in the series earn a spot at the starting gate at Churchill Downs. The three-year-old age limit means that any Thoroughbred only has one opportunity to win the Kentucky Derby in its lifetime. At age three, Thoroughbreds are generally old enough to race fast but young enough to add the element of uncertainty where the winner can’t easily be predicted. The horses reach physical maturity at age four or five, but most have retired from racing by then.  

The history and traditions of the race make it a bucket list item for many fans. Below are some fun facts to know before tomorrow’s race.

• It’s called the “Run for the Roses” because the winning Thoroughbred is adorned with a garland constructed of more than 450 roses that weighs 40 pounds. The garland and the Jockey’s Bouquet of 60 long-stemmed roses tied with 10 yards of red ribbon are delivered to Churchill Downs by a police escort the morning of the Derby.
• Each year, about 120,000 mint juleps, the official drink of the Kentucky Derby, are consumed at Churchill Downs. The drink is made with Kentucky Bourbon, simple syrup, crushed ice, powdered sugar, and mint.
• The record for the quickest finish is held by Secretariat, who won the 1973 Derby with a time of 1:59.40. Secretariat went on to win the Triple Crown that year.
• The racetrack, Churchill Downs, was founded by Meriwether Lewis Clark, Jr., the grandson of the famous explorer William Clark, who alongside Meriwether Lewis led the exploration of the western portion of the U.S. in what is known as the Lewis and Clark expedition in the early 1800s.
• The ornate hats that women traditionally wear to the event are attributed to founder Meriwether Lewis Clark, Jr.’s vision of modeling the Derby after horseracing in Britain and France where it was a mainstay of posh society. Clark and his wife invited the ladies of Louisville to attend with a dress code requirement of “full morning dress” for women and men, which is formal clothing worn before 6pm.
• A race called the Kentucky Oaks has been held every year on the Friday before the Kentucky Derby event. Known as the “Run for the Lilies,” the horses running are three-year-old fillies or females. The winner is adorned with a garland of Lillies appropriately called “Lillies for the fillies.”
• Now in its 11th year, the Thursday before the race is known as “Thurby” at the racetrack, and it’s a day for locals to celebrate Kentucky culture and watch races.  
• Last year set a record for the most money wagered on the Kentucky Derby with $188.7 million in bets. That topped the previous high of $179 million set the year prior in 2022.
• The “walkover” is a Kentucky Derby tradition that owners and trainers dream of participating in at Churchill Downs. On normal race days, a groom or stable employee will walk their horse over from the barns to the paddock where the horses will be saddled for the race. However, on Derby Day, owners and trainers make the quarter-mile walk, along with many in their inner circle, from the barns to the paddock. The walk is in front of a crowd of 160,000 cheering fans. It is filled with excitement and anticipation as horses and their entourage make the procession along the muddy track to begin their quest for the Triple Crown.
• The purse for this year’s Kentucky Derby is $5 million that will be divided among the top finishers. The winner will receive $3.1 million while the runner up will receive $1 million, and the third-place finisher will receive a prize of $500,000.