Last week, the Nasdaq and Nvidia stocks achieved new record highs, reflecting the strong performance during the U.S. earnings season. Early and mid-week releases of the ADP Non-Farm Employment Change and PMI data indicated that the U.S. economy is decelerating, with inflation on a downward trajectory. This led to an overall positive market response, with gold and commodities rebounding, Treasury yields declining, and equities experiencing continuous gains. Cryptocurrencies also returned to their March highs. However, Friday’s data surprised the market as the unemployment rate rose to 4.0%, exceeding the expected 3.9%, and the Non-Farm Employment Change significantly outperformed expectations. This sudden shift in market sentiment suggested a potential delay in rate cuts, causing a spike in the dollar index and Treasury yields, while equity markets, especially cryptocurrencies, swiftly retracted their weekly gains. Market sentiment during the Dragon Boat Festival holiday generally continued to reflect Friday’s data.
Upcoming Pivotal Week: May CPI Data and Federal Reserve Meeting
This week is set to be one of the most critical in recent times, with the release of the May CPI data and the Federal Reserve’s policy meeting, both of which will shape market expectations for liquidity. On June 12th at 8:30 PM, the core CPI and CPI data will be released, serving as crucial indicators for the Federal Reserve’s policy decision later that evening. The core CPI is expected to be 0.3%, while the CPI is projected at 3.4%. Any reading at or below 3.4% would support the case for rate cuts. We lean towards a decline in CPI, considering the overall trend in recent data, which indicates a cooling U.S. economy. The prices of crude oil and other consumer goods are also slowing, potentially resulting in favorable inflation data. Hence, we are inclined to be bullish on the equities market. Additionally, with multiple countries such as those in Europe and Canada already moving towards rate cuts, it is likely the U.S. will not lag far behind.
Federal Funds Rate Outlook
Regarding the Federal Funds Rate decision, we anticipate a dovish stance, with rate cuts potentially advancing if the data supports such a move. The rate is expected to remain at 5.5% in June, with two rate cuts anticipated this year. However, the exact timing will depend on the CPI data. Given the recent market volatility and consolidation over the past two weeks, the market awaits further guidance from the CPI data before taking a clear directional stance.
PPI and Consumer Sentiment Data Releases
On June 13th, the PPI data will be released, with the market expecting a 0.1% increase, down 0.4 percentage points from the previous value. This is closely tied to the current prices of commodities and crude oil. We predict the PPI will decline more rapidly than the CPI, aligning with market expectations. Following this, the University of Michigan’s Consumer Sentiment Index and Inflation Expectations Index will be released on Friday evening. While these are less significant in a week when the CPI is released, their timing will influence market sentiment in the subsequent period.
Market Strategy Ahead of CPI Release
Overall, we anticipate a volatile market ahead of the CPI release. Considering the direction of recent high-frequency data and employment and economic sentiment data over the past two weeks, we expect the CPI to fall short of expectations, supporting the case for rate cuts. Therefore, we plan to strategically increase our exposure to the equities market or use options to profit from short-term volatility. We will maintain our current risk exposure until the CPI data provides further trading guidance.