RECAPPING LAST WEEK
As the week began, investors extended the previous week’s relief rally, fueled by news of a deal to
end the U.S. Iranian conflict and the potential that the Strait of Hormuz may reopen soon. Lower energy
prices supported the Industrials and Materials sectors, and Technology benefited from the overall
improvement in risk sentiment. The Energy sector and Healthcare were the biggest
losers. The Federal Reserve’s June meeting, the first chaired by Kevin Warsh, stole focus by
midweek. Policy makers left the Federal Funds target rate unchanged at 3.5%–3.75%, surprising no one.
The only surprise investors hadn’t anticipated was the hawkish tone of the accompanying projections
and commentary delivered in the press conference. Near–term rates rose in the wake of
the announcement, flattening the yield curve. Investors on the long end took comfort, hoping the Fed
was positioning itself well should inflation accelerate in the future. Despite borrowing costs, economic
data painted a picture of a resilient economy, buoyed by higher–than–expected retail sales,
and expectations that prices at the pump will decline sharply, providing additional consumer relief. The
prospect for higher U.S. short term rates and an easing of the pressure on foreign central banks to hike
rates led the dollar to rally to one–year highs. Precious metals finished the week marginally lower, as the
countervailing forces of a strong dollar overcame their recent tendency to behave more like a risk asset
than a defensive safe–haven. Crypto seems to be fading into the background, under pressure from a
surging dollar and “risk–on” traders who are focusing on the semiconductor and AI space.
THE WEEK AHEAD
This week is likely to be dominated by the ongoing tug–of–war between resilient economic growth and
central banks’ inflation containment efforts, though the sharp decline in energy prices certainly
makes the banks’ situation easier. PMI data from Australia, France, Germany, the U.K. and
U.S. will release on Tuesday. Last month’s data from this group highlighted a divergence: the
Manufacturing component (excluding France) expanded while the
Services component (excluding U.S.) contracted. It’s generally accepted that
the services sector responds to challenging economic conditions more quickly than the manufacturing
sector. The prices paid component will offer a view into inflation seen via business input prices. CPI data
will be released for Canada on Monday and Australia on Wednesday, followed by PCE, “the Fed’s
preferred inflation gauge” on Thursday..
(Schwab)
