The Federal Reserve’s Policy Reassessment: What Does It Mean for Investors? (Weekly Cheat Sheet)

The stock market exhibited a strong performance this week, despite the shortened trading period due to the holiday. The S&P 500, which hovered around 4,100 last week, approached 4,300 on Friday, reaching a peak of 4,290.

The market’s lingering anxiety over the debt ceiling was finally alleviated after both houses of Congress approved an agreement. We can always count on the government to keep spending.

While mega-cap stocks have dominated the market this year, funds started to flow into lagging sectors this week. The Invesco S&P 500 Equal Weight ETF (RSP) rose by 1.9%, while the Vanguard Mega Cap Growth ETF (MGK) saw a 2.0% increase.

Retailer earnings reports this week were mixed, with notable fluctuations in stocks such as Lululemon (LULU), Advance Auto (AAP), Dollar General (DG), and Macy’s (M) following their earnings announcements.

Last week’s largest gains were seen in the S&P 500 consumer discretionary (+3.3%) and real estate (+3.1%) sectors. The smallest increases were in consumer staples (+0.3%) and utilities (+0.8%).

Understanding The Fed

Market participants had to reassess the Federal Reserve’s policy this week due to certain comments from Fed officials. Early on Wednesday, the CME FedWatch Tool showed a 70% chance of another 25 basis point rate hike at the June meeting, following a statement by Cleveland Fed President Mester to the Financial Times. Mester, who is not an FOMC voter, expressed no compelling reason to delay a rate hike in June.

However, later that day, Philadelphia Fed President Harker, a 2023 FOMC voter, and Fed Governor, suggested the Fed could “skip a meeting.” Similarly, Fed Governor Jefferson, also an FOMC voter and nominee for Vice Chair, proposed that delaying a rate hike at the upcoming meeting would allow the Committee to gather more data before deciding on further policy tightening. As a result, the CME FedWatch Tool indicated the probability of a 25 basis point rate hike in June had dropped to 25.6%. Nevertheless, Fed representatives continue to hint at potential future rate hikes.

Positive Jobs Report

A range of job and inflation data was released this week, temporarily easing fears of a recession and rate hikes. Despite a drop in new orders, the May ISM Manufacturing Index revealed a welcome slowdown in the Prices Paid Index. The May Employment Situation Report showed nonfarm payrolls increased by 339,000, average hourly wage growth eased to 4.3% from 4.4%, and the unemployment rate rose to 3.7% from 3.4%. The April JOLTS – Job Openings Report and weekly initial jobless claims both demonstrated continued strength in the labor market.

CALENDAR & MOVERS

  • Monday: Factory Orders (MoM) (April)
  • Wednesday: Trade Deficit (April)
  • Wednesday: Consumer Credit

As we move into the upcoming week, investors can breathe a sigh of relief with the short-term resolution of the debt ceiling crisis. However, they must remain vigilant. The May Jobs Report has recalibrated anticipations regarding the Federal Reserve’s strategy, particularly as we draw closer to the FOMC meeting scheduled for June 13-14.

CONSUMER CREDIT

This week, watch out for the unveiling of consumer credit data by the Federal Reserve, which will provide insights into U.S. consumer borrowing for April. In March, borrowing skyrocketed by $26.5 billion, marking the quickest growth in four months, and credit card balances jumped by 17.3%. Despite the Federal Reserve’s rate hikes, consumers have persisted in their credit-fueled spending, potentially putting household balance sheet health at risk in the future. Nonetheless, forecasts suggest a possible decline in consumer borrowing for April, estimated to be around $20 billion.

BONDS

The US job market continues to demonstrate remarkable tenacity. May’s job creation figures exceeded expectations, rising by 339k compared to the anticipated 195k. This development, however, poses a challenge for the Federal Reserve, which is banking on job losses to rein in inflation and pause its cycle of rate hikes. Despite this, investors, influenced by recent statements from Federal Reserve members, are anticipating no change at the upcoming monetary committee meeting. As per the CME’s Fedwatch tool, the likelihood of a rate hike has dipped to 29%. The US 10-year yield is probing its previous resistance, now a support level of 3.64%. A breach of this level could push the market back towards the crucial medium-term support of 3.34/31%.

COMMODITIES

Oil & Energy

On Sunday, Saudi Arabia declared its intention to reduce oil production by 1 million barrels per day starting in July, a move aimed at bolstering the “stability and balance of oil markets.”While the nation asserts that crude oil prices do not influence its oil production decisions, this action is perceived as an effort to sustain oil prices amidst global economic instability and fears of a potential decline in international demand.In related news, OPEC’s production dropped by 0.5 million barrels per day (mbpd) to 28.26 mbpd in May, as reported by Bloomberg. As for prices, North Sea Brent is currently trading around $75 per barrel, while its US counterpart, WTI, is at approximately $70.50.

Precious Metals & Gold

Base metal prices experienced a resurgence this week, buoyed by a confluence of favorable factors: the revival of risk aversion following the resolution of the US debt issue, a weakening dollar, and a decrease in LME inventories. This has spurred a rebound in copper, aluminum, and tin. Copper, for instance, has surged past the $8,000 mark on the LME, currently trading around $8,200. Gold has also made a comeback, bolstered by falling bond yields, and is now trading around $1980 per ounce.

CRYPTOCURRENCY

May marked Bitcoin’s first monthly decline after four consecutive months of gains since the beginning of the year. This week continues the downward trend set in the previous month, with Bitcoin depreciating nearly 4% and fluctuating around $27,000 at the time of writing. Despite a robust start to the year, the leading digital currency is losing ground and has not shared in the recent investor enthusiasm for tech stocks.

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