Markets have sewn up June in bullish fashion, capping a strong first half of 2023 in style.
For the fourth consecutive month, June saw gains aplenty in US equities – with the S&P 500 rising by 6 per cent to take its year-to-date gains above 15 per cent.
The tech-heavy Nasdaq index saw similar gains last month and is now up more than 38 per cent on the year.
With so much of the recent fundamentals driven by a slowing US inflation story and a resilient US jobs market, the risk-on mood has never been higher this year.
Just last week, the Price Consumption Expenditures price index – the Federal Reserve’s preferred measure of inflation – came in below analysts’ estimates and sparked expectations that there may be as little as two remaining rate hikes left in 2023, with the next hike almost all but delivered at the upcoming meeting in July.
US jobs, starting with weekly jobless claims and filtering through to the monthly US non-farm payrolls report, continue to show a hot labour market, which amid the backdrop of the slowing inflation story, suggests markets are now seeing recessionary threats receding.
All these factors have contributed to solid green arrows across riskier asset classes – and July will be key to gauging how realistic and sustainable the gains will be.
It’s been a shortened trading week as a result of the US Independence Day celebrations, but we will have some key pieces of data in the lead-up to the next Fed meeting this month.
It starts with this Friday’s US jobs report. June payrolls are expected to grow by 225,000 (versus 339,000 in May), while the overall unemployment rate is anticipated at 3.7 per cent. Annual growth in average hourly earnings, a decent gauge on US inflation, is expected to slow to 4.2 per cent, compared with 4.3 per cent in May.
I expect some gains in the labour market, which would suggest the resilience in new jobs added to continue.
Short term, this will be supportive of equities and riskier assets on the day. However, with eyes on the next Fed meeting, to be held on July 25-26, this will further entrench the notion that employment is still running hot and the Fed would be more comfortable with overall unemployment to be in excess of 4 per cent.
The next key piece of data before the Fed convenes and announces rates on July 26 is the US consumer price inflation print, due on July 12. Year on year, the CPI increased by 4 per cent in May, while core prices rose by 5.3 per cent annually.
US Federal Reserve chief warns of 'pain' in reducing inflation
Keep a close eye on how these numbers pan out – clearly inflation is not cooling fast enough – and if we see prints close to the May figures, this could see a slight hawkish tilt, with more caution in the Fed announcement.
These two pieces of data are critical to the Fed’s decision. Currently, the CME FedWatch tool has an 89.9 per cent probability that the Fed will deliver another 25 basis-point hike to take overall rates in the US to a band of 5.25 per cent to 5.5 per cent.
While this is almost a certainty, dissecting their comments – especially with the two data points discussed earlier having been released – will help gauge price action through the end of July and August.
It is my expectation that Fed Chair Jerome Powell will remain cautious and he should keep the door open to leaving policy tools on the cards in case inflation doesn’t recede as quick as expectations to their target 2 per cent range.
With the end of the second quarter in the books, earnings season is set to kick off this Friday, with the usual banking giants JP Morgan, Citibank and Wells Fargo set to announce. Tech majors Microsoft, Google, Facebook and Amazon will follow with their results from July 25.
Markets are currently positioning for an anaemic reporting season. Following an average fall of 2 per cent in earnings per share for the S&P 500 during the first quarter, the EPS losses are expected to exacerbate in the second quarter, with some expecting to see drops of more than 5 per cent when compared with the same period last year.
While the negative story around EPS and slowing revenues are largely priced in, it will be more critical to pay attention to what these companies have to say about future guidance.
Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers
