What happened last week

  • Friday’s strong labor market data defined the trading week.
  • A bipartisan debt ceiling bill averted the tail default scenario, suspending the debt limit until 2025.
  • Whispers about a pause in Fed policy tightening in June grew louder last week as the central bank enters its blackout period.

What we’re watching this week

  • Not much on the event calendar for this week; intermission ahead of next week’s data that should be huge market catalysts.
  • Pulse on domestic manufacturing sector and business sentiment – continue to monitor trend of jobless claims. 
  • Policy decision out of the Reserve Bank of Australia (RBA) round out the Antipodes as inflation data out of Europe could influence next weeks’ European Central Bank decision.

Horizon’s Investment Management Views

The price action on Friday determined the outcome for the whole week. Strong labor market data vaulted domestic small caps over the S&P 500 as investors read resilience in the labor market as a positive signal for future consumption. So long as consumers earn, they will likely spend. That spending is helping to prop up an economy otherwise teetering between “soft landing” and recession. The risk-on spending mood was also boosted by a bipartisan resolution to the debt ceiling impasse and the WSJ’s so-called Fed-whisperer, Nick Timairos, all but confirming a pause in June by the Fed.

We want to emphasize that a Fed on “pause” is not the same as a Fed that’s “done”. The latter has completed the tightening cycle, allowing investors to discount looser policy which reduces market volatility. If the Fed is “paused”, market volatility can increase as the direction of the Fed’s policy remains uncertain; they can just as likely hike or cut interest rates. Markets don’t like uncertainty, especially monetary policy uncertainty. We think that the Fed is erring on the side of caution, pausing in June to get a pulse on the economy. If the strong data continues to come in, the Fed wants to have the optionality to tighten policy once more in July.

We expect a relatively quiet week ahead. This week will feel more like an intermission ahead of next week’s huge macro releases, which include back-to-back CPI and Fed policy decision days. Domestic data is relatively light this week with a few notable gauges of the manufacturing sector (durables & factory orders) and surveys of business sentiment (S&P 500 Index and ISM manufacturing Index). Internationally, we are monitoring the policy decision out of Australia’s central bank and inflation data out of Europe.

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