RECAPPING LAST WEEK
U.S. equities extended their rally for a ninth consecutive week, with the S&P 500 climbing as easing oil prices,
resilient earnings, and AI-linked momentum overcame inflation concerns. Alongside the S&P, the Nasdaq-100,
Nasdaq Composite, and DJIA all closed at record highs on Friday, with only the Russell 2000 pulling back a
touch from Thursday’s record close. Dell’s (DELL) earnings blowout announcement was just the latest example
in a growing list of companies benefiting by massive AI infrastructure spending in a week that also saw Micron
(MU) join the trillion-dollar market cap club. S&P 500 sector performance favored growth and technology,
while consumer discretionary responded well to the lessening of inflation expectations amid a sharp drop in
energy prices which in turn lessened the likelihood of rate hikes. Of course, the flip side of the sector
performance coin was energy as the worst performer followed by consumer staples. U.S. Treasury yields
eased throughout the week, improving risk sentiment, though the broader rate backdrop remains fragile. The
10- year settled below 4.5% and the 30-year under 5%, while the 2-year note, more sensitive to short-term
rate expectations, remained above 4%. Overall, foreign currency markets were quiet amid the minor shifting of
interest rate expectations. For the Yen, this quietness masked a great deal of activity beneath the surface:
over the past month the Japanese Ministry of Finance intervened in the currency markets for the first time
since 2024 selling over $73 billion USD/JPY to support the Yen. As a mercantilist, export-driven economy,
Japan would normally welcome a weaker currency, but in this case concerns about the nation’s dependence
on dollar-denominated imported energy seems to have been the overriding concern. In spite of ongoing
small-scale military skirmishes, progress on the U.S./Iran diplomatic front led to a nearly $10 per barrel
decline in the price of oil. U.S. priorities seem to be getting the Strait of Hormuz open even while Iran, through
its public statements, isn’t backing down from what they claim is their right to enrich uranium. For now, the
market seems focused on the prospect for oil to be able to make it’s way out of the Persian Gulf again.
Precious metals were quiet, apparently neither a risk-on nor risk-off proxy this week, while over the past two
weeks, the insatiable demand for tech stocks has led to a negative correlation of crypto with equities.0–
year settled below 4.5% and the 30–year under 5%, while the 2–year note, more sensitive to short–termiable demand for tech stocks has led to a negative correlation of crypto with equities.THE WEEK AHEAD
The June 5 U.S. non–farm payrolls report is the week’s marquee event, with markets eager to learn
whether labor will put up strong numbers, meaning the Fed will be likely to leave rates higher for
longer, or will show signs of cooling, which could ease Treasury yield pressure. Macro investors will
also be watching developments in U.S.–Iranian negotiations—If the market sees continued
momentum toward a solution that reopens the Strait of Hormuz, lower energy prices and inflation
expectations could be on the horizon. This would extend the virtuous circle whereby these trends
reduce the chance of rate hikes, which in turn could support the ongoing sharp rally in equity
markets. Of course, if talks fail and and the U.S. revives its active military campaign, equity markets
could very well be facing the same headwinds of higher inflation expectations due to a sustained
increase in energy prices which they’ve previously pushed through. ISM manufacturing and services
data will help clarify the growth/inflation mix, clarifying whether companies’ efforts to pass higher
input costs through to consumers are resulting in softening demand. If energy prices remain under
pressure, the market’s focus on inflation numbers will likely shift toward growth and employment
data, the latter of which we’ll see plenty of this week. In addition to Friday’s report, Tuesday sees the
JOLTS job openings number, Wednesday brings data from the private payroll company ADP, and the
weekly jobless claims numbers arrive on Thursday.
(Schwab)
