Will Fed Pump Markets!
Gold losing it glitter
KR Opinion
Looking ahead to the upcoming week, the FOMC meeting minutes are coming on Wednesday. I expect the Fed will maintain its current stance, with no changes in interest rates. The overall tone will likely be somewhat positive, suggesting that inflation behaves as desired.
With the recent uptick in unemployment to 4%, the Fed will probably see this as favorable since it helps keep demand in check.
Regarding the broader picture, many market participants expect the Fed to lower rates to stimulate the economy. However, I argue that interest rates will be market-driven for some time. The Fed will maintain a balance sheet of $6 to $7.5 trillion and be ready to address minor banking disruptions through the discount window and other facilities.
Major banks are in good condition, balancing risk and capital well, and the Fed has ample resources to support any significant capital dislocations, much like it did with Silicon Valley Bank and Republic Bank.
Importantly, allowing markets to control interest rates, especially on the back end of the curve, provides long-term flexibility. The current short end of the curve doesn't seem overly restrictive, as the impactful rates are more on mortgages and the back end of the curve, with markets adjusting to higher levels.
A significant amount of money will need refinancing in the next two years, particularly in multifamily and commercial real estate. I believe this will happen in an orderly, with deals cash flowing differently and margins tightening, but without a system collapse.
The debate about the Fed raising or lowering rates is less relevant to the economy's future operation, considering the cost and demand for money seem well-balanced. As we move forward, income generation from various real estate sectors will evolve, impacting income properties and commercial real estate, but this sector will remain robust.
Additionally, we are expecting CPI and PPI data, with both expected to increase by 0.1% month over month and 0.3% year over year. The Fed will continue to suggest that inflation appears to be under control and will likely maintain a dovish tone during the FOMC meeting minutes. This approach should support the markets as we move forward.
Looking back on last week
Last week, the major indices saw gains primarily due to the outperformance of mega-cap stocks compared to their smaller counterparts. Despite some selling pressures, the broader market showed strong resilience. The market-cap-weighted S&P 500 index gained 1.3%, while the equal-weighted S&P 500 declined by 0.7%. Both the S&P 500 and Nasdaq Composite reached new all-time highs.
The Vanguard Mega Cap Growth ETF (MGK) rose 3.3%, and the PHLX Semiconductor Index (SOX) increased 3.2%. NVIDIA (NVDA) stood out by surpassing a $3 trillion market value for the first time on a closing basis.
Strength in semiconductor stocks and megacaps contributed to significant gains in the S&P 500 information technology (+3.8%), consumer discretionary (+1.5%), and communication services (+1.7%) sectors. In contrast, the utilities (-3.9%) and energy (-3.5%) sectors experienced the largest declines.
Economic growth concerns tempered the broader market's performance in response to last week's economic data. The ISM Manufacturing Index for May indicated a faster contraction than expected, job openings in April decreased compared to March, and the May Employment Situation Report showed higher-than-expected earnings growth.
Treasury yields fell following the data and the first rate cut by the ECB since September 2019. The 10-year note yield decreased by eight basis points to 4.43%, and the 2-year note yield fell by two basis points to 4.87%.
In the week's final session, there was limited conviction on either side of the market. Despite gains in the major indices for most of the session, an underlying negative bias was present. This downside bias was driven by a sharp increase in market rates following the May Employment Situation Report, which revealed higher-than-expected payroll and earnings growth. Despite this, stocks remained resilient in the face of selling efforts.
Reviewing Friday's economic data:
- May Nonfarm Payrolls: 272K (KR Forecast consensus 185K); Prior revised to 165K from 175K
- May Nonfarm Private Payrolls: 229K (KR Forecast consensus 168K); Prior revised to 158K from 167K
- May Avg. Hourly Earnings: 0.4% (KR Forecast consensus 0.3%); Prior 0.2%
- May Unemployment Rate: 4.0% (KR Forecast consensus 3.9%); Prior 3.9%
- May Average Workweek: 34.3 (KR Forecast consensus 34.3); Prior 34.3
The key takeaway from the report is embedded in the Treasury market's knee-jerk selloff in the wake of it: this release won't placate the Fed's inflation concerns.
- April Wholesale Inventories: 0.1% (KR Forecast consensus 0.2%); Prior revised to -0.5% from -0.4
Week of June 10 Economic Releases
Here is the revised version with "Briefing.com" and "B.com" replaced by "KR Forecast" and
Jun 11
- 06:00 ET: NFIB Small Business Optimism
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: 89.7
Jun 12
- 07:00 ET: MBA Mortgage Applications Index
- For: 06/08
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: -5.2%
- 08:30 ET: CPI
- For: May
- Trading Impact: High
- KR Forecast: 0.1%
- KR Consensus: 0.1%
- Prior: 0.3%
- 08:30 ET: Core CPI
- For: May
- Trading Impact: High
- KR Forecast: 0.3%
- KR Consensus: 0.3%
- Prior: 0.3%
- 10:30 ET: EIA Crude Oil Inventories
- For: 06/08
- Trading Impact: High
- KR Forecast: NA
- KR Consensus: NA
- Prior: NA
- 14:00 ET: FOMC Rate Decision
- For: Jun
- Trading Impact: High
- Actual: --
- KR Forecast: 5.25-5.50%
- KR Consensus: 5.25-5.50%
- Prior: 5.25-5.50%
- 14:00 ET: Treasury Budget
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: $209.5B
Jun 13
- 08:30 ET: Initial Claims
- For: 06/08
- Trading Impact: High
- KR Forecast: 226K
- KR Consensus: 224K
- Prior: 229K
- 08:30 ET: Continuing Claims
- For: 06/01
- Trading Impact: High
- KR Forecast: NA
- KR Consensus: NA
- Prior: 1792K
- 08:30 ET: PPI
- For: May
- Trading Impact: High
- KR Forecast: 0.1%
- KR Consensus: 0.1%
- Prior: 0.5%
- 08:30 ET: Core PPI
- For: May
- Trading Impact: High
- KR Forecast: 0.3%
- KR Consensus: 0.3%
- Prior: 0.5%
- 10:30 ET: EIA Natural Gas Inventories
- For: 06/08
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: +98 bcf
Jun 14
- 08:30 ET: Import Prices
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: 0.9%
- 08:30 ET: Import Prices ex-oil
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: 0.7%
- 08:30 ET: Export Prices
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: 0.5%
- 08:30 ET: Export Prices ex-ag.
- For: May
- Trading Impact: Low
- KR Forecast: NA
- KR Consensus: NA
- Prior: 0.7%
- 10:00 ET: Univ. of Michigan Consumer Sentiment - Prelim
- For: June
- Trading Impact: High
- KR Forecast: 71.5
- KR Consensus: 73.0
- Prior: 69.1
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