What happened last week
- It was a quiet week, with recent trends reversing in favor of year-to-date underperformers like small-caps and Chinese equities.
- Technical factors drove price action last week, with macro and fundamental drivers lacking.
- Front-end Treasury yields climbed as the odds of rate cuts in 2023 continued to decline.
What we’re watching this week
- Huge market catalysts this week include a Fed meeting and Consumer Price Index (CPI) report for May.
- Expect a “pause”, not “end”, to Fed’s tightening cycle on Wednesday; outside chance of a hike if CPI comes in hot.
- Watching for Foreign Exchange read-throughs from policy decisions and messaging out of the European Centra Bank and Bank of Japan.
Horizon’s Investment Management Views
- Last week was largely undistinguished. In the intermission to the catalyst-heavy week ahead, the rally in domestic mega-cap tech cooled as year-to-date underperformers like domestic small-caps and China outperformed. We think that this equity rotation was more a result of technical factors than the start of a new trend; the AI theme was becoming extremely overbought heading into last week. In the fixed-income market, yields at the short-end of the Treasury curve rose ahead of this week’s Federal Reserve meeting as investors continued to chip away at prospects of rate cuts in 2023.
- The catalyst-laden week ahead with the Federal Open Market Committee (FOMC) decision release on Wednesday in addition to an update to the Fed’s Summary of Economic Projections (SEP) and a likely “pause in rate increases.” A hike here, although unlikely, could be prompted by stronger than expected inflation print from Tuesday’s CPI report. Investors expect the Fed’s updated “dot plot” to indicate at least one more 25 bp hike this year.
- A surprise rate hike could result in increased monetary policy uncertainty and financial market volatility. Such a decision would mark the first such departure from the market’s expectations in the current tightening cycle. Trend inflation is stabilizing around 5%, an undesirable outcome from the perspective of the Fed. Economists’ consensus estimates point to another month of elevated core inflation; a significant surprise in either direction will likely spur disparate market outcomes. A lower-than-expected reading is likely to produce risk-on-price action, whereas a much higher-than-expected reading will likely increase the odds of more hikes and pressure asset prices.
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