AI Gets a Boost, Fed Pause and Weak Retail Sales

The Biden-McCarthy debt ceiling deal passed the Senate late last night and will move onto the President's desk, preventing what might have been a U.S. debt default.

After a brief slowdown in the unstoppable, artificial intelligence-fueled advance of big tech, the sector is back in full force. Nvidia Corp. (NVDA) climbed roughly 5% on the back of Microsoft Corp. (MSFT) signing a deal for A.I. computing power with Nvidia-backed Core Weave that could be worth billions and Meta Platforms Inc. (META) was up 3% with the announcement of its new VR headset.

Markets also considered the fact that the Institute for Supply Management’s (ISM) prices paid component fell sharply – down 9 points to 44.2.

No matter how bullish investors might be about the potential for artificial intelligence, they should be prepared to weather corrections along the way.


Fed Weighs Pause on Weak Manufacturing Data

Aside from the AI theme, traders also geared up for the monthly jobs report, with forecasters projecting a moderation in the pace of hiring that could potentially allow the Fed to pause its tightening policy in June.

Like every day this week, we got to hear from another Fed governor. Fed Bank of Philadelphia President Patrick Harker said “we should at least skip this meeting in terms of an increase. In an essay Thursday, his St. Louis counterpart James Bullard, says he believes interest rates are at the low end of what’s likely to be "sufficiently restrictive" to bring down inflation.

May’s ISM and S&P global manufacturing reports shows companies continue to reduce inventories and backlogs as the new order index remained in contraction territory. This is one more data point that could push Fed Governors to vote for a pause in interest rate hikes.


Retail Stocks

Retail had a tough day Thursday as consumers get squeezed. This week’s batch of retail and consumer goods earnings suggests the premium and mid-market consumer are also getting squeezed.

Victoria’s Secret & Co. (VSCO) plummeted 9% after its first quarter earnings missed. The apparel company cut its outlook, citing competition from cheaper products and sales weakness in North America versus international markets. Macy’s Inc. (M) also lowered its sales outlook to as consumers “reallocated spend to food, essentials, and services.” Earlier in the week we also saw Michael Kors owner Capri Holdings Ltd (CPRI) take a hit. The CEO said US sales are likely to remain soft throughout the summer. This now puts the stock roughly 50% off its February highs. Calvin Klein parent PVH Corp. (PVH) joined the party as well with a big guidance miss, sending the stock down almost 10%

Discount retailers are also under pressure. Dollar General Corp. (DG) took a 20% haircut after reducing its profit guidance, warning that earnings will fall and that the macroeconomic environment is more challenging than anticipated. This is only a week after Dollar Tree slashed its outlook as well.

While there are signs of consumer strength, The SPDR S&P Retail ETF (XRT) is down 5% this year compared to the S&P 500, which is up roughly 10%