Last week’s macroeconomic data was dramatized by many media outlets as a “night of terror” with the simultaneous release of May’s CPI data and the June Federal Reserve meeting. In reality, the CPI data and Powell’s speech essentially canceled each other out, resulting in a limited impact on equity markets. The US May CPI annual rate rose by 3.3%, lower than the expected 3.4%. Bitcoin surged over 5%, while the yield on the US 10-year Treasury fell more than 2%, dropping to 4.27%.
Powell’s hawkish remarks and the dot plot indicating only one rate cut this year quickly dampened market enthusiasm. The Fed did not place excessive importance on this inflation data, focusing instead on unemployment and the long-term decline in inflation. Powell confirmed that the Fed could change the dot plot and rate path procedurally following the release of inflation data, implying that this higher-than-expected inflation data was not significant enough for the FOMC members to alter their decisions. Powell’s speech was not surprising given his past statements, aiming to support the capital markets during adverse economic data and temper them when data is favorable. Following the release of the dot plot and FOMC minutes, most markets retracted earlier gains, returning to pre-data levels.
Last week’s PPI data decline and the rise in initial jobless claims indicated a cooling economy, providing only a brief boost to equity markets before they fell back. Notably, the NASDAQ stood out among equity markets. Amidst pullbacks in equities, commodities, and cryptocurrencies, the NASDAQ continued to hit new highs, driven by AI developments and strong earnings reports. The “Magnificent 7” (Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia) remain market darlings. This situation has raised concerns about potential correction risks, specifically fears of an abrupt economic downturn and black swan events.
Additionally, Europe has emerged as another significant risk factor. French President Emmanuel Macron decided to dissolve the National Assembly and called for new legislative elections after his party’s defeat in the European Parliament elections. Macron’s party, Renaissance, lagged far behind the far-right National Rally, which won about 32% of the vote compared to Renaissance’s 15%. Macron’s decision aims to address the rise of far-right parties across Europe, emphasizing the need for a clear majority to ensure national harmony and stability. This move, seen as a high-stakes gamble, could further strengthen far-right forces. Market analysis suggests that if the far-right party comes to power in France, there is a high possibility of France leaving the EU, leading to greater geopolitical instability. The French FRA40 index fell over 9% this week, with European markets similarly impacted.
Next week’s economic data is generally of limited importance. On Tuesday, June 18, at 8:30 PM, US retail data will be released, with an expected growth of 0.3% compared to the previous value of 0.0%. If this data exceeds expectations, it would indicate that the economy remains overheated. However, with rising jobless claims and limited inflation decline, primarily driven by service prices like rents, physical consumption is likely to fall short of expectations, favoring the market in the short term.
On Friday, June 21, at 9:45 PM, the preliminary US S&P Global Manufacturing and Services PMI for June will be released, with forecasts of 51 and 53.4, respectively, still in expansion territory. However, considering the consistency of previous data, we similarly expect them to fall short of expectations, supporting future rate cut prospects.
Overall, our strategy for this week in the equity markets will be a cautious one: reducing risk exposure and shifting towards fixed income. Given the market’s current phase of potential topping and possible pullbacks, if the market continues to rise, we will consider gradually selling to lock in profits. If it falls, we will maintain our current exposure.