KEY DRIVERS & CALENDAR

TIP – This is a brief bullet-point summary. It is a tool that gives investors and financial advisors a fast and simple list of what to news and market data watch that may move the markets.

• Ukraine Conflict (Movement Possible if Peace Agreement Reached)
• Rising Inflation, Recession & Stagflation Fears
• Chinese Lockdowns Ending
• Thursday, June 9 – Initial Jobless Claims
• Friday, June 10 – Core CPI (MoM) (May)

Investors will discuss inflation once more next week, when the latest consumer price index is released on June 10. Economists predict that headline inflation will be 8.2% Y/Y in May, down from 8.3% in April, and that core CPI, which excludes food and energy costs, will fall to 5.9% from 6.2 percent. If there is no upside CPI surprise, some analysts believe there could be a relief bounce.

WEEKLY REPORT

S&P 500

S&P 500 SECTORS

Tip: Use this section to know various sectors’ performance, and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

VIX

Macro Market Report: Bad News is Good News?

The bad news is now the good news! Financial markets are improving as a good old habit returns: any signal that could influence the Fed’s rate hike is welcomed.

As a result, a poor macroeconomic statistic usually prompts the argument that “if things become worse, the Fed will be forced to curtail rate hikes.” We cling to what we have. Simultaneously, the prospect of a Chinese awakening combined with the loosening of restrictions in the country creates a little more upbeat atmosphere.

Last week, the markets rose; however, Friday was a challenging day for Wall Street after Elon Musk expressed concerns about the economy. The market has adjusted to the Federal Reserve’s less accommodative policies and appears to be less concerned about an impending recession. Inflation in the United States may have peaked in March and April, but the Federal Reserve still has a long way to go before reaching its 2% inflation target.

The Fed could keep raising rates for a while longer, but it would be unconcerned. In the medium term, caution is the order of the day.

Update from the Federal Reserve (Mixed Signals)

The Federal Open Market Committee (FOMC) is widely expected to decide to raise interest rates by 50 basis points at its subsequent two sessions in June and July. The effective Federal Funds Rate (FFR) will be 2% due to this. After this interval, speculation is rampant.

Some Fed officials, including Fed Chair Jerome Powell, suggest that suspending or at least pausing interest rate hikes in September could be the right call. While this situation will need to be re-evaluated periodically, Atlanta Fed President Raphael Bostic agrees with Powell that it may make sense to delay rate rises in September while the balance sheet continues to drain. He expects markets to cool, and he believes inflation will begin to trend downward at that point.

After the rate hikes in June and July, Mary Daly, President of the San Francisco Fed, said we “need to look around and monitor” inflation, war, consumer activity, and the economy’s weakening. The fear is that a rate hike delay will be retroactive, causing economic damage that could have been prevented if hikes continued.

Federal Reserve Vice Chair Lael Brainard, who appears hawkish, stated last week that it is very difficult to understand the argument for a pause. To get inflation down to our target of 2%, we still have a long way to go.”

This comes after hawkish Fed Governor Christopher Waller stated that he would not rule out 50 basis point rate hikes until inflation falls closer to the Fed’s target of 2%. In fact, Waller stated that he was willing “to do more,” implying that he would support rises of 75 basis points. Finally, Kansas City Fed President Esther George said she isn’t sure if a pause is a smart idea, considering the economy’s consequences due to trillions in excess savings among American consumers.

Bottomline

The Fed is likely to decide that the only way to treat the economy’s inflationary sores is to kill demand. Markets will have to retreat to cut demand sufficiently to keep inflation in check, and the Fed will continue to do so by raising interest rates.

If inflation remains high, it appears likely that the Fed will continue to raise rates past neutral. In terms of September, the Fed is most likely avoiding a concrete plan to prevent market panic, as a 2.5 percent increase to the FFR would most likely push the FFR past the ‘neutral rate,’ causing investors to prepare for a recession and begin selling stocks at an uncomfortably high rate before the Fed had raised rates sufficiently.

Assume we experience a recession before interest rates are raised. In that event, future rate hikes will further depress markets, compounding the effect, explaining why the Fed has been so ‘wishy-washy’ about its July and August plans in the past.

Is the Real Estate Bubble About to Burst?

The home market may be next. Home prices will begin to fall (we are already seeing them fall in certain areas) if mortgage rates continue to rise and refinancing applications continue to fall. Market conditions will also force builders to start fewer development plans.

The mortgage market is hedging its risk against the disappearing money from the Fed’s balance sheet for mortgage-backed securities as the Fed decides whether to pause or continue rate hikes. If the Fed continues to miss its inflation targets or underestimate future inflation levels, it will have a negative impact on mortgage rates.

TRUFLATION UPDATE

We are adding in a snapshot of inflation from Trueflation.com (We don’t have any association with the firm and were not given monetary compensation) There are many reasons to expect that the supply situation will worsen next year and boost inflation. The sad reality is that the real inflation number is much much higher.

Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

BONDS

At the start of last week, US rates appeared to be retreating, as investors expected the Fed to ease its stance in the face of worse economic data. However, they rapidly recovered, and the 10-year maturity now pays roughly 2.98 percent, up from 2.73 percent at the end of the previous week. Meanwhile, central bankers Loretta Mester and Lael Brainard have stated that interest rates may need to be lifted again in September. The week in Europe was also marked by a dramatic increase in interest rates.

CRUDE OIL

This week, oil prices have been on a roller coaster again. The European Union’s member countries have finally agreed on a ban on Russian oil. However, it is a restricted ban, as it only applies to marine imports. Pipelines are not targeted, which is a compromise that will buy time to address the concerns of Central European countries’ reliance on Russian oil. Parallel to this, OPEC+ opted to increase production slightly more than planned in July and August during a meeting this week (648 million barrels per day more, instead of 432 million more than in the previous months). However, with most members straining to fulfill their production requirements, it’s hard to envision OPEC+ output rising considerably in the coming months, especially if Russian output falls. Brent is currently trading near USD 118 per barrel, while WTI, the US benchmark, is trading near USD 117.

PRECIOUS METALS

China’s metals prices continue to swing back and forth. Beijing has lifted the cost of metals that are particularly susceptible to this issue, such as nickel and tin, by announcing a new support scheme for renewable energy. In London, the latter is trading at USD 27710 and USD 35250, respectively. Copper has also increased in price, reaching USD 9455 per metric ton. Gold and silver are fighting to recover in the precious metals market, selling at USD 1862 and USD 22.2.

CRYPTOCURRENCY

Bitcoin, for example, may halt a nine-week losing skid if it closes above USD 29,500 on Sunday night. At the time of writing, it was hovering around USD 30,000. The digital currency is still not out of the woods in this severely deteriorated macroeconomic situation, having lost more than 30% of its capitalization in the last two months, and may yet test the nerves of crypto-investors in June.