The Fed pauses and ponders

• Global market indices
• Currencies
• Cryptocurrencies
• Fixed Income
• Commodity sector news
• Key data to move markets this week
• Global macro updates

US Stock Indices 

Nasdaq 100 +5.28% MTD and +37.17% YTD 
Dow Jones Industrial Average +3.96% MTD and +3.21% YTD 
NYSE +5.08% MTD and +3.02% YTD 
S&P 500 +4.53% MTD and +13.79% YTD 

Mega caps: Alphabet, Amazon, Apple, Microsoft, Nvidia, Meta Platforms, and Tesla are all up this week as investors continue to pile into companies associated with AI. 

Nvidia hit an all-time high, extending this year’s surge, while Tesla fell on Wednesday, ending its 13-session streak of gains, its longest ever. Over $43 billion worth of Tesla shares were traded on Wednesday, more than any other stock in the S&P 500.

Google’s parent Alphabet was charged by EU antitrust regulators with anti-competitive practices in its digital advertising business on Wednesday. It may have to sell part of its adtech business to address concerns about anti-competitive practices. According to Refinitiv, the European Commission set out its charges in a statement of objections to Google two years after opening an investigation into behaviours such as favouring its own advertising services, which could also lead to a fine of as much as 10% of Google's annual global turnover.

Energy stocks were largely down this week as oil continued to fall on concerns over slower than expected Chinese growth, an increase in US stocks, and the suggestion of further rate rises from the Fed in July which would strengthen the USD. Apa Corp (US), ConocoPhillips, Chevron, Marathon Petroleum, Phillips 66, Occidental Petroleum, Energy Fuels, and Halliburton were all down. However, Shell was up this week after it issued a statement that it will increase its overall shareholder distribution to 30% to 40% of cash flow from operations, resulting in a 15% increase in dividend per share effective Q2 2023. Shell also said it will increase the rate of its share buyback programme from the second quarter, spending $5 billion rather than $4 billion in recent quarters. It will also keep oil output steady into 2030.

Materials and Mining stocks were mixed again this week. The weaker dollar and expectations of further stimulus from the People’s Bank of China to lift demand helped to lift copper, aluminium, and Zinc. Albemarle Corporation, Freeport-McMoran, Mosaic, CF Industries Holdings, Newmont Mining, and Nucor Corporation are up, while DuPont de Nemours Inc. and Sibanye Stillwater are down.

Yara International shares fell dramatically this week after the Annual General Meeting approved a dividend of NOK 55.00 per share to be paid on 22 June 2023 to shareholders as of 12 June 2023, and the Yara share will be traded ex-dividend from 13 June 2023. American Depositary Receipts (ADRs) will also be traded ex-dividend from 13 June 2023.

European Stock Indices 

Stoxx 600 +2.92% MTD and +9.43% YTD 
DAX +4.13% MTD and +17.15% YTD 
CAC 40 +3.24% MTD and +13.20% YTD 
IBEX 35 +4.23% MTD and +14.63% YTD 
FTSE MIB +6.75% MTD and +17.30% YTD
FTSE 100 +2.10% MTD and +2.03% YTD 

Other Global Stock Indices 

MSCI World Index +4.73% MTD and +11.82% YTD
Hang Seng +6.44% MTD and -1.89% YTD

Currencies

The USD fell to four week lows on Wednesday after the Fed held interest rates steady, but signalled another 50 basis points (bps) rise by end-December. The GBP is +4.57% YTD against the USD. Sterling continued to climb this week due to data showing annual wage growth at 7.2% and GDP at 0.2% for April, raising expectations that the Bank of England (BoE) will continue to raise rates with the terminal rate approaching 6%. Sterling has risen to its highest level against the dollar since April 2022. The EUR is +1.22% YTD against the USD on the expectation that the ECB will continue to raise rates in June and July. Sterling also rose to its highest level since August against the Euro this week, to €1.1705, before retreating to €1.1693.

Cryptocurrencies

Bitcoin -7.54% MTD and +51.25% YTD
Ethereum -11.45% MTD and +37.89% YTD

Cryptocurrencies continued to feel the fall out from SEC lawsuits against Binance and Coinbase with those mentioned in the SEC cases being hardest hit. They were also down after the Fed made clear that the pause in its rate hike cycle may only be temporary. 

Fixed Income

US 10-year yield to 3.80%.
German 10-year yield to 2.45%.
UK 10-year yield to 4.39%.

US yields were up over the past week as markets anticipated a pause then another rise. UK short-dated gilt yields reached a 15-year high on Wednesday as rising wages, stronger than expected GDP growth, and stickier inflation have raised market expectations of a peak rate to over 5.7%. A sell-off in UK government debt on Tuesday pushed two year yields up to their highest level since last year’s disastrous “mini” budget. German yields have risen due to the expectation of further ECB rate rises as well.

Commodities

Gold futures to $1,956.20 an ounce.
Silver futures to $23.99 per ounce.
West Texas Intermediate crude to $68.67 a barrel.
Brent crude to $73.20 a barrel.

Gold has been range bound this week as investors looked forward to the Fed’s policy decision, falling to an almost three month low on advancing Treasury yields and a stronger dollar after the Fed kept interest rates unchanged, but suggested more rate hikes this year and that there wouldn’t be a rate cut for the next couple of years. 

Oil prices had a bumpy week, rising on Tuesday with hopes of increased demand from China as the PBoC lowered a short term lending rate and gave indications of further cuts. However, those hopes were cut on Wednesday after the Fed suggested more interest rate hikes this year which would lead to USD appreciation and weaken oil demand from other countries. This came on top of an unexpected rise in US crude oil stockpiles by 7.9 million barrels in the week to 9 June. The Energy Information Administration (EIA) increased its oil demand growth forecast for this year by 200,000 barrels per day (bpd) to 2.4 million bpd, lifting the projected total to 102.3 million bpd. However, the EIA expects economic headwinds to reduce growth to 860,000 bpd in 2024. It also said that the increasing use of electric vehicles will help to reduce that to 400,000 bpd in 2028 for overall demand of 105.7 million bpd.

Note: As of 6 pm EDT 14 June 2023

Key data to move markets this week

EUROPE 

Thursday: Eurogroup meeting, a speech by Bundesbank President Joachim Nagel, and ECB Monetary Policy Decision Statement.
Friday: Eurozone Harmonised Index of Consumer Prices and Labour costs. 
Tuesday: German Producer Price Index.
Thursday: Eurozone Consumer Confidence.

UK

Thursday: A speech by BoE Deputy Governor for Financial Stability, Sir Jon Cunliffe.
Wednesday: CPI, PPI and RPI
Thursday: Bank of England Interest Rate Decision, Bank of England Monetary Policy Summary, Bank of England minutes, and GfK Consumer Confidence. 

US

Thursday: Initial jobless claims, Continuing jobless claims, Philadelphia Fed Manufacturing Survey, Retail Sales, Capacity Utilisation, and Industrial Production.
Friday: Speeches by St. Louis Fed President James Bullard and Fed Board of Governors member Christopher Waller, Michigan Consumer Sentiment Index, and UoM 5-year Consumer Inflation Expectations. 
Monday: US markets will be closed for the Juneteenth holiday. 
Tuesday: Building Permits and Housing Starts. 
Thursday: Chicago Fed National Activity Index, Initial jobless claims, Continuing jobless claims, and Bank Stress Test Info.

ASIA

Friday: Bank of Japan interest rate decision and Monetary policy statement. 
Monday: People’s Bank of China interest rate decision. 

Global Macro Updates

The Fed isn’t done. May PPI came in down 0.3% while it increased 1.1% year-on-year, smallest gain since 2020. The costs of energy, goods and food declined, signalling that inflation pressures are moderating throughout the economy. The Fed kept the federal funds rate at the existing target range of 5 to 5.25%, but forecast two more quarter-point hikes in its economic projections this year. The Fed said, "holding the target (interest rate) range steady at this meeting allows the committee to assess additional information and its implications for monetary policy." Basically this means that the Fed is still assessing the impact of banking sector volatility and consequent credit tightening earlier this year as well as the lagged effects of its own policy tightening. FOMC members now expect the fed funds rate to peak at 5.6% this year, up from the 5.1% they projected in the last set of forecasts released in March. The majority of FOMC members, 12 out of 18, pencilled in rates at or above the median range of 5.5% to 5.75%. The target rate has also changed, going down to 4.6% in 2024 versus the 4.3% forecast in March, and to 3.4% in 2025, compared to the 3.1% in the March forecasts. Chairman Jerome Powell said that the July meeting would be “live” and that rate cuts are “at least a couple of years out.” The Fed growth forecasts also changed with GDP now expected to grow 1% this year, from the 0.4% forecast in March, and to grow 1.1% next year, compared to the last forecast of 1.2%. Unemployment, currently at 3.7%, is expected to rise less than predicted in March to 4.1% this year and to 4.5% in 2024. It appears that the Fed is expecting a soft landing. Nevertheless, the dot plot projections do support the “higher for longer” thesis for interest rates. 

When should the ECB stop? The ECB is highly anticipated to raise rates again today by 25 bps to 3.50% as inflation, despite falls in energy prices, remains at a stubbornly high 6.1%. The market is already pricing in another 25 bps rise in July. That would take the ECB's deposit rate up to 3.75% in a tightening cycle that began last July. However, with unemployment at record lows of 6.5% and wages still rising, the ECB may feel it has no choice but to continue to tighten. This is despite the Eurozone already being in a technical recession in the first three months of 2023 and bank lending rates falling. According to data from Eurostat, Eurozone GDP fell by 0.1% in the first quarter compared with the final quarter of 2022, when GDP also slipped by 0.1%, revised from a previous reading of zero. 

BoE’s inflation miscalculation. According to Refinitiv, traders see a 79% chance of a 25-basis-point rate rise at next week's meeting, and a 21% chance of a 50 bps rise with bets that the BoE's Bank Rate - currently at 4.5% - could go as high as 5.7% by the end of 2023. This is largely due to secondary effects, namely a wage inflation spiral. The BoE has already raised the rate 12 times during its current tightening cycle, however, the full effects of the rate hikes are taking much longer to pass through the economy than in prior rate cycles, according to former MPC member Michael Saunders in a Bloomberg news report today. The BoE estimates only a third of the rate hikes since the end of 2021 have fed through to consumers and businesses. BoE Governor Andrew Bailey said the wage data showed the labour market was "very tight" and that inflation was taking “a lot longer than we expected” to be brought under control. UK short-dated gilt yields reached a 15-year high on Wednesday. The UK mortgage market is already showing signs of strain. The next important data point for the BoE will be the consumer price index on 21 June, the day before the BoE convenes.

US Republicans push against the SEC on crypto. House Financial Services Committee Republicans asked the US Securities and Exchange Commission (SEC) to rescind its proposed rule to change the definition of “exchange.” In a letter to the SEC it said the SEC’s proposed rule will “stifle innovation and harm digital asset market participants and the US economy more broadly.” As noted by crypto newsite Decrypt.co, the rule change, first proposed by the SEC last year, would redefine the term “exchange” within the Securities Exchange Act to “include systems that offer the use of non-firm trading interest and communications protocols to bring together buyers and sellers of securities.” Republican lawmakers argue that this definition exceeds the SEC’s powers and would “shut down the development of the digital asset ecosystem and continue to stagnate US technological innovation.” The Blockchain Association also filed comments on the SEC’s proposed amendment to Rule 3b-16 of the Securities Exchange Act of 1934, which ended 13 June. According to Cointelegraph.com, the Blockchain Association said in its letter that the SEC is exceeding its authority, citing the major questions doctrine, which the US Supreme Court recently affirmed. The association also said the broad language of the proposal could make validators part of an exchange, even though they operate competitively. The proposal also raises freedom of speech concerns, according to the Blockchain Association.

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