U.S. and International Equities
All major market indexes ended higher as the Federal Reserve kept rates unchanged. The European Central Bank increased interest rates this week as expected. Moreover, inflationary conditions in the U.S. are showing steady improvement following the Federal Reserve’s hawkish policy stance.
Market breadth conditions continue to improve. Goldman Sachs recently noted that 397 constituents of the S&P 500 Index are higher versus the year-to-date average of 259 stocks amid the over 15% gain in this year’s S&P 500 Index. Some investors believe the economy could witness a soft landing given better-than-expected payrolls, removal of the debt ceiling overhang, and a pause on interest rate hikes.
Bank of America reported that U.S. equity funds have attracted $38 billion during the past three weeks, which represents the strongest stretch since last October. Money market funds witnessed their first outflow in roughly two months. The bank noted that U.S. value mutual funds witnessed their first positive inflows in 13 weeks, breaking their longest outflow streak since June 2019.
Small-cap mutual funds attracted $4.8 billion in the latest week, which represents the largest inflow since last June. Technology fund flows are the standout as they have attracted $19 billion in the past couple of months, representing their best run since March 2021. Markets have witnessed a notable improvement in market breadth and recent fund flow data support the recent market moves.
Fixed Income Higher
The Bloomberg Aggregate Bond Index finished higher this week amid high profile global central bank meetings. High-yield credit also had a positive week on the back of higher equity prices and continues to be a leader in the fixed income asset class year to date. High yield has performed well despite the traditional reasons the asset has struggled amid Federal Reserve rate hikes along with default rates increasing and tighter lending standards. LPL Research believes that valuations aren’t compelling enough given the aforementioned risks.
As expected, the U.S. Treasury Department has started to increase the issuance size of Treasury Bills (T-bills) in an effort to replenish its general account as well as fund government operations following the resolution of the debt ceiling standoff. Recent auctions have been well supported with demand from foreign investors significantly higher than in previous years, which we expect to continue due to higher U.S. rates.
Energy prices ended higher this week as natural gas prices continue to rally from this year’s pullback. The major metals (gold, silver, and copper) finished the week mixed. Prices for most commodities have moved lower year to date, with coal, natural gas, and nickel among 2023’s big decliners. So far, this year’s major commodity advancers have been feeder cattle, sugar, and cocoa amid supply shortages. Gold has also bucked the trend following increasing global central bank demand.
Economic Weekly Roundup
Federal Reserve Pauses
The Federal Open Market Committee (FOMC) kept rates unchanged Wednesday following the conclusion of its two-day meeting, but communicated a hawkish bias to future interest rate decisions. With a slight tweak, the FOMC statement was modestly hawkish but still communicated to investors that the committee is data-dependent when “determining the extent of additional policy firming that may be appropriate.” Notably, they do not say more tightening “will” be appropriate.
European Central Bank Remains Hawkish
The European Central Bank raised borrowing costs to their highest level in 22 years and left the option open for additional rate hikes, extending the bank’s fight against high inflation even as the region’s economy is on shaky ground. Two quarters of gross domestic product (GDP) contraction from Germany placed the Eurozone into a shallow recession last winter, though the nation’s economy could still produce modest growth in 2023. That being said, the region’s unemployment is at record lows, while wage growth is picking up amid labor shortages.
Inflation is getting closer to the Federal Reserve’s (Fed) target, but some prices are still frustratingly sticky. Highlights from the CPI report (May): Consumer prices rose 0.1% in May, pulling the annual rate of inflation down to 4.0%, the lowest annual rate since March 2021.The largest contributor to the monthly increase in prices were shelter costs.
Energy prices were the largest drag, falling 3.6% in May. Prices at restaurants are still rising at a fast clip, indicating consumer demand is still strong for restaurant service. The overall theme in recent months has been strong consumer demand for experiences over items, and we are seeing that play out in consumer pricing dynamics.
German inflation eased in the month of May. The nation’s CPI was 6.1% year over year in May, which is down from April’s 7.2%. Like much of Europe, German inflation is driven by persistently high prices for energy and food. Energy rose 2.6% year over year and continues to be affected by geopolitical events such as the Russia-Ukraine conflict and production decisions coming from the Middle East. Food prices also remain historically elevated, sitting at a 14.9% increase year over year.
Initial claims for the latest week came in above economists’ consensus expectation and at the same level as the prior week. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, came in above the prior week’s levels, but below economists’ expectation. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
Monday: NAHB Housing Market Index (Jun)
Tuesday: Building permits (Jun), housing starts (Jun)
Thursday: Weekly initial and continuing unemployment claims, current accounts (Q1), existing home sales (May), leading indicators (May),
Friday: PMI Composite (Jun), S&P Global PMI Manufacturing (Jun), S&P Global PMI Services (Jun)
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