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Debt ceiling done, Fed goes quiet: What to watch this week

Following a strong jobs report, a signed deal to raise the nation's borrowing limit, and the beginning of the Federal Reserve's quiet period ahead of its June 13-14 policy meeting, investors will get a reprieve of sorts in the week ahead.

Investors reading the Fed tea leaves now see the central bank pausing rate hikes in two weeks, but some economists argue the May Jobs report proves the Fed’s job isn’t done. The US economy created more than 300,000 jobs last month, the most since January.

On the corporate side, earnings will continue to wind down with results from meme stock favorite GameStop (GME) serving as a highlight.

Apple's latest Worldwide Developers Conference on Monday at its headquarters in Cupertino, California will be among the week's biggest events, with the iPhone maker set to reveal its mixed reality headset, among other upgrades across its product line. Yahoo Finance's Dan Howley will be live on the ground with full coverage on Monday.

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Investors had largely shrugged off any potential market uncertainty related to the debt ceiling over the past week with the market's focus instead focusing to renewed enthusiasm for tech stocks, which barreled higher to close out May.

On the week, all three major indexes rose more than 3% with the Nasdaq Composite (^IXIC) pacing gains once again, rising more than 4%. Year-to-date, the Nasdaq Composite (^IXIC) has risen 26.5%, while the S&P 500 (^GSPC) is up 11.5%, and the Dow Jones Industrial Average (^DJI) has gained just less than 2%.

The S&P 500 finished last week's trading at its highest level since August 2022, with the team at Bespoke Investment Group noting Friday the benchmark index is now unchanged on a total return basis since the beginning of the Fed's rate hikes in March 2022.

On Friday, the May jobs showed the US economy added 339,000 jobs in May while job gains were revised higher for each of the last two months. The unemployment rate rose to 3.7% last month while wage gains cooled to 4.3% over the last year.

"Despite an unexpected increase in the unemployment rate, the key takeaway from the May employment data is that the labor market remains surprisingly strong and resilient," Citi economist Veronica Clark wrote in a note on Friday.

"It will be hard for the Fed to conclude activity is slowing enough to bring inflation sustainably back to target. We continue to pencil in 25bp rate hikes in both June and July."

But regardless of what happens in June, strong data has economists thinking interest rates might stay higher for longer.

“The Federal Reserve isn't close to declaring victory on taming inflation,” Oxford Economics' chief US economist Ryan Sweet wrote on Friday. "We can't rule out another rate hike in the second half of the year, but the central bank will be more cautious than we previously anticipated in easing monetary policy in 2024."

Data from the CME Group as of Friday showed investors still expect the Fed will keep rates unchanged on June 14.

And with investors appearing confident in the Fed's next step, hype around AI stocks drove markets higher for a second straight week.

Research from Bank of America showed investors bought tech stocks in May at the most aggressive pace since February 2021. And not everyone chasing this theme is limiting themselves to Nvidia (NVDA).

The latest name to emerge in the AI race was MongoDB (MDB), which saw its stock gain nearly 30% on Friday as CEO Dev Ittycheria noted in the company's earnings release: "We believe the recent breakthroughs in AI represent the next frontier of software development."

But Jefferies equity analyst Andrew Uerkwitz argued in a note the buzz phrase for tech this week will be XR, not AI, with Apples expected to launch its new headset on Monday in what Uerwkitz said could be "one of the most important days in recent Apple history."

Unlike Microsoft (MSFT) and Google (GOOGL), which mentioned AI north of 45 times during their earnings calls according to Jefferies, Apple mentioned Wall Street's favorite phrase of 2023 just twice during its call with investors in early May.

"We expect a continued measured approach — likely focused on highlighting where [AI is] currently being deployed as well as arguing Apple is the platform its developers will safely deploy the new technology," Uerkwitz wrote. "XR will likely be the biggest topic, and we worry that in the near term, investors may start to question this strategy."

Apple CEO Tim Cook, right, reacts after seeing an old Macintosh Classic machine brought by a visitor during the opening of the first Apple Inc. flagship store in Mumbai, India, Tuesday, April 18, 2023. Apple Inc. opened its first flagship store in India in a much-anticipated launch Tuesday that highlights the company's growing aspirations to expand in the country it also hopes to turn into a potential manufacturing hub. (AP Photo/Rafiq Maqbool)
Apple CEO Tim Cook, right, reacts after seeing an old Macintosh Classic machine brought by a visitor during the opening of the first Apple Inc. flagship store in Mumbai, India, Tuesday, April 18, 2023. (AP Photo/Rafiq Maqbool) (ASSOCIATED PRESS)

In addition to the rally in AI stocks, last week's trading action showed areas of the market that had been beaten down in recent months found favor again after Friday's jobs report. The SDPR S&P Regional Banking ETF (KRE), for instance, rose more than 6% on Friday. Meanwhile Industrial (XLI) and Materials (XLB) stocks also rallied Friday, with names including 3M Company (MMM) and Caterpillar (CAT) surging nearly 10%.

And while Friday's action showed investors betting on more cyclical names tied to the economic cycle, not all economists and strategists are convinced this run of data changes the long-term story for the US economy. One in which a recession remains in the offing.

"We see us in this late-cycle environment, which can be really trick," Emily Roland, co-Chief Investment Strategist at John Hancock Investment Management told Yahoo Finance Live.

"The data are bouncing around all over the place. Again, we're seeing very different reads on the economy. We do think that this likely unfolds into a recession."

Weekly Calendar

Monday

Earnings: No notable earnings set for release.

Economic data: S&P Global US Services PMI, May final (55.1 expected, 55.1 previously); S&P Global US Composite PMI, May final (54.5 expected, 54.5 previously); Factory orders, April (+0.8% expected, +0.9% previously); Durable goods orders, April final (+1.1% expected, +1.1% previously); ISM Services Index, May (52.4 expected, 51.9 previously)

Tuesday

Economic data: None

Earnings: Academy Sports + Outdoors (ASO), Casey's General Stores (CSY), Cracker Barrel Old Country Store (CBRL) Dave & Busters (PLAY), The J.M. Smucker Co. (SJM), Stitch Fix (SFIX)

Wednesday

Economic data: MBA weekly mortgage applications, week ended June 2 (-3.7% previously)

Earnings: Campbell Soup Company (CPB), GameStop (GME), Rent the Runway (RENT), The Lovesac Company (LOVE), Vera Bradley (VRA)

Thursday

Economic data: Weekly initial jobless claims (238,000 expected, 232,000 previously); Continuing claims, week ended May 27 (1.8 million expected, 1.8 million previously); Wholesale inventories, month-over-month, April (-0.1% expected, +0.1% previously); Wholesale trade sales, month-over-month, April (+1% expected, -2.1% previously)

Earnings: Docusign (DOCU), Duckhorn Portfolio (NAPA)

Friday

Economic data: No notable data set for release.

Earnings: Nio (NIO)

Josh is a reporter for Yahoo Finance.

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