The week in the markets -
May 26, 2023

Entering summer with cautious optimism

• U.S. home sales rose in April on robust demand, despite economic headwinds and higher mortgage rates.
• Sticky inflation in the U.K. and U.S. weighed on central bankers.
• Nvidia exceeded Q1 expectations, propelled by AI focus. 
   

Despite economic headwinds in the U.S., home sales continued to surprise to the upside, as purchases of new single-family homes increased by 4.1% in April, even as the median price dropped 8.2% from a year earlier, averaging US$420,800. Despite mortgage rates being twice as high as they were at the end of 2021, homebuilders are seeing robust demand. The S&P Composite 1500 Homebuilder sub-index has gained over 26% for the year to date, and over 43% over the last 12 months, driven by the lack of existing home inventory and more millennials entering the first-time homebuyer's market. Interestingly, there has been a shift in inventory, as one in three homes are now new builds, compared to one in 10 historically. This has been primarily driven by existing homeowners not wanting to give up their lower locked-in mortgage rates.

April data from the U.S. Federal Reserve’s favoured inflation indicator, the Personal Consumption Expenditures Index (PCE), came in slightly higher than expected, with both the headline and core PCE deflator increasing by 0.4%. In response to this environment, the upcoming Federal Open Market Committee (FOMC) could consider a potential 25-basis-point rate hike at its next meeting. However, our view remains that with the recent crisis in confidence in the regional banking sector, along with a potential eleventh-hour deal on the debt ceiling, it's more likely that a pause will be the preferred option heading into the summer.

In the United Kingdom, inflation data was released this week showing a slight decrease from 10.1% in March to 8.7% in April, which was higher than expected. This leaves the Bank of England little choice but to look at raising its central bank rate again in June to battle inflation. Looking ahead, the consumer price index in the U.K. is expected to continue its downward trend, with the hope that June should mark the last rate hike, with the rate sitting at 4.5%, compared to 1% a year ago.

In tech news, Nvidia, a front-running global chip manufacturer, released noteworthy results this week. Beating analyst expectations, sales for Q1 were US$7.19 billion, up 19% from the previous quarter. The results were largely anchored to Nvidia's strategic emphasis on AI development in their large data centres. The company’s CEO announced an ambitious plan to upgrade data centre infrastructure aimed at accommodating cutting-edge generative AI tools, such as ChatGPT. This underscores the transformative role of AI technology in steering Nvidia’s growth trajectory. The company’s forecast precipitated a notable surge in Nvidia’s shares, with a huge jump in share price after results were posted. Share price appreciation for the year to date is over 164%, rewarding the stock for its effective leverage of the promising AI revolution, and solidifying its position in the sector. Given the strong demand for AI and large language models, this area of the tech sector has seen stronger growth than the rest of the market. We note that this will be of keen interest for many other tech companies in the sector as they grow out their competitive advantages.

For more insights, check out our Podcast on the “Weightful Eight,” where we discuss the impact of a top-heavy market, with the eight biggest companies accounting for 25% of the S&P 500.