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Good afternoon,

The bull market is back, inflation is dipping, earnings are improving and AI hype has excited every great aunt and their dog to get invested.

It’s a heavy duty data week, with the CPI out on Tuesday, PPI on Wednesday and Powell throwing the after-party Wednesday afternoon.

Let’s dive in.

Economy Heat Check

As of 6/9/2023 market close, unless otherwise stated.

Friday Flashback

• The RBA hiked their cash rate by 25 bps to 4.1%, warning further tightening may be required.

• The BOC surprised markets with a 25 bps hike to 4.75%, citing stubbornly high inflation.

• RBA and BOC hikes saw traders reconsider the potential for the Fed to hike at the July FOMC.

• China’s imports and exports continued to slide as demand for goods fell, fanning concerns for the global growth outlook.

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Bullish & Bearish

↑ Stock Market: The S&P 500 breached a technical bull market, so banks have raised their year-end price target: BoA to 4300, Deutsche to 4500 and Goldman to 4500.

↓ Currencies: The Turkish lira hit a new record low against USD as central authorities veer towards a free market.

↑ Gold: Heads for best week in five on Fed rate pause bets.

↓ Oil: Edges lower ahead of Fed meeting.

↓ Crypto: Solano, Cardano and Polygon plunge ~30% as big firms dump holdings after SEC allegations.

↑ Money Markets: Household assets in money markets rise by $300B to record $3.3T.

↑ Real Estate: Higher interest rates and significant levels of equity are driving the resurgence in home equity loan (HELOAN) originations.

↓ Venture: Global venture funding fell 44% y/y to $22B in May.

Week Ahead: Signal to Noise

This week’s market outlook and whether you should actually care.

Signals

US Inflation and Instability

CPI is the new coffee, as May’s inflation data drops the morning the Fed starts its deliberations. Headline inflation is expected to slow further, but don’t get too excited. Core inflation – the relevant one – may remain well above the Fed’s target.

The main wildcard is housing costs, which are a sufficiently large component of the CPI. Given the current state of the housing market, industry experts anticipate housing costs will drive May’s CPI materially lower. An uncomfortably hot inflation report on Wednesday could tip the scales in favor of another hike. This would send the US dollar soaring with yields, weighing on Wall Street, gold and commodities futures.

A more realistic outcome is that inflation will come in or around expectations. Expect a slight softening – but still elevated by historical standards. Some still hold out hope for a healthy drop in inflation, which would likely cement a Powell pause. It would also bring forward expectations of the Fed’s cut, weighing on the US dollar and yields accordingly.

Powell’s Pause Party  

For the first time in more than a year, Powell plans to pause. Or at least that’s the latest Wall Street whisper currently being blast across town. The Fed meets Tuesday and Wednesday to drum up any remaining drama before, as most expect, announcing the decision to forgo an interest-rate increase.

Over the past couple of weeks, market expectations have come full circle from pricing in a pause, to pricing in a hike and back again. Some data points could easily warrant a hike – and back up hawkish comments from some Fed members – but others point to a pause. But what tips the scales in favor of another hold next week is that Vice Chair Jefferson backed up comments, which alluded to a pause from Powell, ahead of the Fed’s recent blackout period.

Another hot nonfarm payrolls report of 283k jobs serves as a reminder that the job market remains tight – even if unemployment rose to a (historically low) level of 3.7%. But, perhaps the best proxy for the Fed’s Wednesday decision is what happens with Tuesday’s inflation report.

The Fed fund futures currently implies a 65.6% chance of a pause this week, or a 34.4% probability of a 25 bps hike. Take note that there’s currently a 49.9% chance of a 25 bps hike in July, or 47.2% chance of one in September. Look out for the quarterly staff forecasts, updated dot plot and press conference, each of which can sway market opinion after the decision. A typical pattern in recent history is to see markets construe the decision as dovish…before the press conference reverses the initial move.

ECB Crashes Powell’s Party

Not even a recession can hold back the ECB, who looks set to raise interest rates again in its Thursday meeting. The ECB is expected to raise borrowing costs by 25 bps, marking the eighth consecutive hike since July of the previous year.

The bank's efforts have had some impact, as eurozone inflation has slowed from a peak of 10.6% in October to 6.1% in May. But with the ECB's inflation target of 2% still well out of reach, policymakers are indicating that rate hikes may continue beyond June.

The ECB's decision to raise rates comes as the eurozone unexpectedly experienced a winter recession, with the economy shrinking by 0.1% for two consecutive quarters. Red flags are raising about the region's ability to cope with the fallout from Russia's war, casting doubts on optimistic predictions for 2023.

Despite the recession, the ECB remains focused on bringing down inflation – noteworthy news for first-time readers who didn’t know what the ECB’s job involved. ECB President Lagarde continues to express concerns about wages becoming a driver of inflation, as workers demand salary increases to offset higher living costs. Watch to see if the ECB hints at a further rate hike in July, depending on the latest forecasts unveiled Thursday.

Noise

Monday, June 12:

• US: Federal budget

• New Zealand: Migration and visitors

• Japan: Business Survey Index

• China: FDI

Tuesday, June 13:

• US: Redbook; Cleveland Fed CPI

• Australia: Consumer sentiment; NAB Business Confidence

• EU: ZEW economic sentiment; CPI (Germany)

• UK: Employment data

• New Zealand: Current account; Food Price Index

Wednesday, June 14:

• US: Mortgage data; PPI

• UK: GDP; Services output

• EU: Industrial production

• New Zealand: GDP

• Japan: Machinery orders; Trade balance; Foreign investment

Thursday, June 15:

• US: NY Fed Manufacturing; Business and retail inventories

• China: House prices; Urban investment; Industrial output; Retail sales

• Japan: Tertiary industry activity NSA

• EU: Eurostat Trade NSA; Total trade balance; Reserve assets; Wholesale Price Index (Germany); Producer/Import Price (Switzerland); CPI (France)

Friday, June 16:

• US: UMich consumer sentiment

• Japan: BOJ Rate Decision

• EU: HICP; Labor costs; Wages

Lit’s Pick & Put

↑ A top China battery maker thinks it has cracked a tech for even cheaper, more powerful packs for EVs (AN)

↓ Cardboard box demand, a leading indicator for goods demand, is dipping even worse than 2022. So traders are dipping out of markets, worried about the latest recession signal (FW)

Meme Bank

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