RECAPPING LAST WEEK
Last week’s overarching story in equity markets was the artificial intelligence trade—after an
extraordinary run, investors decided it had become overextended. Heavy declines in Samsung
Electronics and SK Hynix fueled an over 10% decline in South Korea’s KOSPI index on Tuesday, a
market that is still up 125% YTD. At midweek, all eyes turned to Micron Technologies quarterly
earnings—where the company delivered another exceptionally strong report that reinforced
expectations of ongoing robust demand for memory chips. However this story, which reinforced the
bullish case for AI–related capital spending, was undercut by Apple’s subsequent announcement
that they would no longer absorb surging chip costs, and therefore raised prices on their laptops,
tablets, and other devices. This led to a selloff in several of the companies’ “Magnificent Seven”
peers. Defensive names were the biggest beneficiaries of the rotation: Healthcare, Utilities, and
Consumer Staples sectors gained, while Consumer Discretionary and Communication Services
were pressured along with the Technology sector. Despite the churn in equities, the broader
macroeconomic backdrop remained relatively constructive—crude oil’s decline to pre–war prices
below $70 per barrel helped temper inflation concerns, leading to modest declines across the
Treasury yield curve. Declines in energy prices and inflation expectations impacted precious
metals, as did strength in the dollar, which is just off its 1–year highs. In an interview on CNBC,
Secretary Bessent used Venezuela’s and Iran’s new ability to sell oil for dollars to outline a vision
that would not only maintain but expand the dollar’s central role in international trade and as the
world’s reserve currency. Bitcoin meandered near its one–year lows, as investors found no
support for crypto assets in any of this news.
THE WEEK AHEAD
The U.S. Employment report will certainly be the highlight of this shortened holiday week that
ends the first half of 2026. From March through May the economy generated an average of 155k
jobs per month. Economists, who vastly underestimated each of those figures now expect that the
U.S. will have created 114k jobs in June. Other labor market data will serve as appetizers to
Thursday’s main course, including the JOLTS jobs openings report on Tuesday and the ADP private
payrolls report on Wednesday. Stronger–than–expected figures from these reports could increase
the odds of a 25 bps hike in the Federal funds rate as soon as late July’s FOMC meeting—those
odds currently sit at just 30%. While crude oil’s sharp decline has certainly helped temper long–
term inflation expectations, those declines have yet to filter down to consumers at the pump.
“Crack spreads”–a proxy for refining margins, remain near their wartime highs. Economists refer to
this well–understood phenomenon as “Sticky downward prices”—it occurs when the decline in
price of a finished good (gasoline) lags a decline in the price of its input (crude oil). The Russell
indices will rebalance on Monday, driving additional intramarket activity following on from the
divergence in memory chip suppliers and buyers last week. The most notable event will, of course,
be the addition of SpaceX to the large cap Russell 1000 index along with pre–positioning flows
ahead of its anticipated addition to the Nasdaq 100 Index on July 6th.
(Schwab)
