US stocks saw gains on Friday but ended the week with mixed results due to inflation concerns triggered by robust economic data and Nvidia’s impressive first-quarter earnings report. 

Inflation Concerns and Economic Data 

The release of strong economic data on Thursday, particularly from the PMI report, sparked fresh inflation fears.

The strong performance in services and manufacturing suggested that the Federal Reserve might maintain higher interest rates for a longer period. 

As a result, expectations for a Fed rate cut shifted from September to the November FOMC meeting, according to the CME FedWatch Tool. 

Next week’s PCE data release will be closely watched by investors to better understand the inflation trend. 

Tech Sector Boost from Nvidia 

On the tech front, Nvidia’s strong first-quarter earnings report on Wednesday significantly boosted AI-related tech stocks.

The Nasdaq 100 reached a new record closing high, with Nvidia’s shares soaring to record levels above $1,000. The company exceeded estimates for both earnings and revenue, and generated excitement for its upcoming Blackwell chip. 

Weekly Performance of Major Indices 

For the week, the Dow Jones Industrial Average fell by 2.3%, the S&P 500 remained nearly unchanged, and the Nasdaq 100 increased by about 1.4%. 

Closing levels on Friday, May 24^th, 2024: 

Market Reactions to Fed Minutes 

The sell-off on Thursday was attributed to the inflationary PMI data and, more importantly, the Fed minutes. Federal Reserve officials indicated a willingness to raise interest rates again if inflation doesn’t cool off further, according to minutes of the April-May meeting released Wednesday.  

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes said. 

The Fed released a summary of their April 30-May 1 closed-door discussion three weeks after the meeting. At the meeting, the Fed voted to keep its benchmark interest rate in a range of 5.25%-5.5%, where it has been since last July. 

Fed officials expressed dismay about “disappointing” inflation readings, saying the most recent data “pointed to more persistence in inflation in coming months.” 

Bond yields spiked with the change in expectation for a Fed cut moving out to November. 

Market Sentiment and Outlook 

On Friday, the market likely reassessed its fears, deeming it highly unlikely for the Fed to raise rates any time soon.  

This retracement was expected to be shallow, and while some volatility is anticipated next week, especially around the PCE data on Friday, the underlying trend remains upward. 

The tug-of-war between the early vs. late Fed cuts will probably continue until the next Fed meeting, but the upward trend is strong, making it challenging for shorts. 

However, Thursday’s sell-off could serve as a warning for late longs. Deeper corrections may trigger a snowball effect of stop losses. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.   

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