RECAPPING LAST WEEK
Major US equity indices pushed to fresh highs early in the week, as AI and semiconductor strength helped
support the S&P500 and Nasdaq, before rising yields and renewed inflation concerns pressured growth stocks
into the close. Market leadership remained narrow and tech–driven, with investors continuing to reward AI–
related earnings momentum, though high–multiple equities remain sensitive to any backup to rates. Treasuries
weakened across all maturities flirting with some cases crossing psychologically important yield levels that
also represent 1–year highs with 2 years at 4%, 10 at years 4.5% and 30 years poking through 5% for the first
time since last summer. The catalyst was the hotter than expected CPI and PPI reports, showing year over
year inflation running at 3.8% and 6% respectively which not only killed market expectations of any chance of
a near term cut but meaningfully priced in chances for hikes by year end. Fed Funds Futures began the week
at a 95% likelihood that the FOMC would hold rates steady at its June 17th meeting, with a 5% chance of a 25
basis point cut. Those figures ended the week at 99.2% and 0.8% respectively. Perhaps more importantly
looking further out towards the last meeting of the year, the market now sets a 50% chance of no rate
change, a 40% chance of a 25 bps hike and a 10% chance of a 50 bps hike. The dollar, while largely a non–
event for over a year, firmed a touch against all the major currencies through Thursday and moved sharply
higher on Friday as part of the market’s realignment to pricing in a meaningful potential for rate hikes. Crude
oil remained firm with the now active July contract hovering around $100 per barrel while the strong
backwardation remains as the soon to expire June contract is trading north of $105. The cease–fire with Iran
remained in place even as the U.S. dismissed that country’s conditions for reopening the Strait of Hormuz.
This appeared to be driven more by the need to avoid distractions during the U.S./Chinese summit, rather than
hopes for an imminent diplomatic solution. Precious metals were part of Friday’s overall “risk–off” trade
despite holding firm earlier in the week, with silver down over 10% on the day. The U.S. delegation to the
Beijing Summit included CEOs representing more than 20% of the market cap of the S&P 500, so the event
had the potential to generate market moving news, though in reality few deals were announced. After the first
day Reuters reported that Nvidia was granted approval to sell their 2nd tier H200 chips to 10 Chinese firms, but
follow–up reporting implied that the Chinese were at best indifferent to this offer. The administration’s
announcement that China had committed to purchasing 200 Boeing jets was the only other notable deal with
numbers attached, and the President later commented to reporters that the final number could be as high as
750 if delivery of the first 200 goes well. Treasury’s Bessent also mentioned in an interview on Thursday that
the US would be dropping tariffs against “cheap consumer goods” that the U.S. has no interest in
manufacturing domestically but there wasn’t much in the way of follow up coverage. For the Chinese,
attempting to alter the U.S’s “strategic ambiguity” policy concerning Taiwan was the main opportunity.
THE WEEK AHEAD
It’s said that the market likes to throw a challenge at new Fed chairs, and Mr. Warsh may certainly have one
on his hands, given the political pressure to cut rates even as the markets have transitioned to pricing in hikes.
Will skeptical FOMC members buy into his argument that large scale AI adoption will lead to a productivity
boom that would offset any energy related inflation? Alternatively, he could argue simply that hiking rates isn’t
appropriate to counteract a perceived short term supply shock in a key commodity that is already adversely
impacting lower and middle income consumers. Global PMIs will be a key cross–market catalyst, with
preliminary reading from the U.S., Germany, the Eurozone, and the U.K. helping investors assess whether
global manufacturing and services momentum is improving or being pressured by higher input costs.
Domestically, the U.S. economic calendar doesn’t offer much else in the way of impactful data this week. On
the international front, Tuesday and Wednesday will offer a look at how the energy price spike is affecting
Canadian and UK consumers with the release of their CPI reports and Australian unemployment figures are
released on Thursday. With the Beijing summit in the rearview mirror, the focus will likely turn back to Iran. As
of the time of this writing, diplomatic efforts seem stalled and the administration appears to be growing
increasingly frustrated that efforts to get the Strait of Hormuz opened have yet to yield meaningful results.
Speaking of yields, with rates across the curve sitting at, near, or just through one–year highs, some will
wonder if Mr. Warsh will be dealing with “Bond Vigilantes” right out of the gate. The prospectus for the
SpaceX IPO could be filed as early as this week, which would start the 20 day “quiet period” window before
the IPO could occur. Some reporting has indicated that the roadshow will commence June 8th with a valuation
of $1.25 Trillion, though the public offering will “only” be in the $70–$75 billion range. It’s yet to be determined
whether SpaceX will be added to indices like the Nasdaq 100 imminently, a carrot that the exchange had been
rumored to be offering as an incentive to secure the listing. At the $1.25T valuation, it would be the 10th largest
component of the index, behind Meta (META) and ahead of Walmart (WMT), representing about a 3.5%
weighting in the index. The QQQ ETF alone, with assets of $464B, would have to acquire about $16B worth of
shares, over 20% of the public float. While we just addressed the largest anticipated IPO ever, it’s only fitting
that we finish addressing the longest continuously listed security. On Thursday, the Bank of New York,
founded in 1784 and first publicly traded in 1792 from the “Buttonwood Agreement” that laid the foundation for
the NYSE, will change its ticker symbol from BK to BNY. Quite the legacy there, Mr. Hamilton
(Schwab)
