Weekly market insights

1. Economic growth in the U.S. is likely to cool and fall below trend, potentially reaching sub 1.0%. While a traditional recession with multiple quarters of negative growth may not occur, certain sectors may experience downturns while others stabilize and rebound.
2. Inflation is expected to trend lower as economic growth cools. Forward-looking indicators for inflation, such as the ISM prices paid indexes, supply chain pressure metrics, and used car prices, are all showing downward trends. The Federal Reserve may find relief in cooling wage growth and easing services prices, allowing for some relief in core inflation.
3. The Federal Reserve is likely to pause its interest-rate hiking cycle in the second half of 2023. Although the Fed has projected a peak fed funds rate of 5.6% with two more rate hikes, markets anticipate only one more hike in July before a pause. The Fed will likely remain highly data-dependent and could signal rate cuts by the end of the year or early next year if inflation continues to moderate.
4. Opportunities are emerging in both equity and bond markets. While there may be some periods of volatility and potential economic slowdown, this presents opportunities for investors to position themselves ahead of a more sustainable recovery. Sectors such as small-cap stocks, cyclical sectors (e.g., industrials, materials, consumer discretionary), international equities, and AI and technology may show leadership in the equity market. In the bond market, there may be opportunities to complement short duration bonds and cash-like instruments with longer-duration bonds, particularly in the investment-grade space, as Treasury yields potentially peak in the weeks ahead.
5. U.S. stock market: The U.S. stock market experienced a decline in a holiday-shortened trading week. This break in the winning streak, along with signs of potential future Federal Reserve rate hikes and a decrease in manufacturing output, may indicate a cautious sentiment among investors. The performance of growth stocks, value shares, large-caps, and small-caps can provide insights into market dynamics and investor preferences.
6. European markets: European markets, including the STOXX Europe 600 Index, major stock indexes like Germany's DAX and France's CAC 40 Index, experienced declines. Concerns over potential recession in Britain and the eurozone, along with hawkish comments by the U.S. Federal Reserve Chair, contributed to the negative sentiment. Additionally, the Bank of England's decision to accelerate the pace of interest rate increases indicates a response to inflation concerns.
7. Japan's stock market: Japan's stock markets retreated from their 33-year highs, with the Nikkei 225 Index and TOPIX Index experiencing declines. The hot core consumer inflation print in Japan and speculation about the Bank of Japan revising its inflation forecasts may have influenced market sentiment. The divergence between the monetary policy of the Bank of Japan and other major central banks can impact yields and currency exchange rates.
8. Chinese stock market: Chinese stocks experienced a decline amid concerns about the country's economic recovery. The lack of stimulus measures, slowing export demand, a housing market slump, and weak business and consumer confidence contributed to these concerns. The tax break package for electric vehicle purchases may aim to stimulate demand and production in the EV sector.
9. Turkey's central bank: The Turkish central bank raised its one-week repo auction rate by 650 basis points, though it was below market expectations. The central bank aims to establish a disinflation course and reach the inflation target. Further interest rate increases and potential fiscal policy changes may be expected.
10. Chile's central bank: Chile's central bank kept its monetary policy rate unchanged but saw two board members voting for a rate cut. The central bank's forward guidance suggests a potential downward process in the short term if positive economic trends continue. Revisions in growth and inflation outlooks, as indicated in the monetary policy report, align with the dovish tilt of the central bank.
11. Student loan payment resumption: With the pandemic student loan debt relief program ending on June 30 and payments resuming in late August, there is a risk that the resumption of student loan payments will detract from spending in discretionary areas such as clothing and entertainment. Younger Americans, who hold a majority of student loan debt, tend to have higher credit card debt and smaller accumulated savings, making them more likely to be affected by the resumption of payments. This could result in a moderate hit to the economy as consumer spending in these areas decreases.
12. Impact of tightening measures: The Federal Reserve's hawkish messaging and the potential for further tightening in the coming months, along with the resumption of student loan payments, could add to the vulnerability of the economy. The timing of these events, coupled with falling inflation and economic uncertainties, may make it challenging for the economy to withstand the impact of monetary and credit tightening. The prediction suggests that even a modest consumer pullback could have a negative effect on the economy.
13. Economic resilience: Despite the emerging cracks and risks, the data indicates that economic growth has been resilient so far. This resilience suggests that the economy may be able to weather tighter conditions for a longer period. However, it is important to monitor the potential cumulative impact of multiple factors such as student loan payment resumption, tightening measures, and other economic storm clouds that may pose challenges to this resilience.
14. Near-term pullback in equity markets: The data suggests that a near-term pullback is likely in equity markets, including the S&P 500, Nasdaq, Dow Industrial Average, and Russell 2000. Technical analysis indicators, such as retracement levels and resistance bands, are being closely watched by analysts, and these indicators point to short-term pullbacks in the mentioned indices. This does not anticipate a major correction and considers the pullback as a necessary and healthy event for the markets.
15. Weakness in growth and technology stocks: During the coming weeks, the weakness in equity markets is expected to be more pronounced in the advanced growth and technology stocks. These sectors, which have shown significant gains in recent times, are likely to experience a pullback. Investors should be prepared for this weakness in these areas of the market.
16. Improvement in lagging sectors: The data suggests that areas of the equity market that have lagged in 2023, such as Industrials and Healthcare, are showing signs of improvement. While these sectors may also experience short-term pullbacks, they are considered more timely areas for diversifying portfolio exposure. This indicates a potential shift in market sentiment towards sectors that have previously underperformed.
17. Long-term upside for industrial sector: The industrial sector is highlighted as an area of interest, showing recent strength and a technical profile that suggests a potential breakout from a multi-year trading range. While a short-term pullback is expected, the longer-term outlook for the industrial sector indicates further upside potential in 2023.
18. For the S&P 500: The first support level is identified near the August highs and the 50% retracement level, which is a technical analysis tool that measures the magnitude of a previous decline. The specific range for this support level is between 4311 and 4325. It is worth noting that this level coincides with the 62% retracement level of the 2022 decline, indicating a significant potential support area. The next support level is identified between 4155 and 4195. This range also corresponds to a 50% retracement level of the 2022 decline.
19. For the Nasdaq: The first support level is between 13,181 and 13,150. This level represents a 50% retracement of the 2022 bear market, suggesting a potential area where the decline could find support and reverse. The next support level is within the range of 12,427 to 12,270. This range aligns with the breakout that occurred in the second quarter (Q2) and also corresponds to a 38% retracement level. This indicates another significant support area.
20. UK Politics: The Labour Party is expected to focus on "making Brexit work" and transforming Britain into a "clean energy superpower" by 2030. If Labour wins the next election, they will inherit a country with deep scars from Brexit and the Bank of England's monetary policy tightening. The economic challenges and higher interest rates could negatively impact consumer spending and the housing market, potentially improving Labour's electoral prospects.
21. UK Equities: The recommendation for UK equities is to maintain an underweight position due to the subdued outlook for the domestic economy. However, opportunities exist in internationally focused equities, particularly those in defensive sectors such as Utilities, Health Care, and Consumer Staples. The valuation of the FTSE All-Share Index is considered attractive, and dividends from UK companies are generous.
22. Euro Zone: The euro zone has entered a technical recession, with a contraction in regional GDP. Economic activity in service sectors is holding up, but manufacturing is experiencing a slump due to global destocking. While the outlook is muted, fiscal stimulus and low unemployment levels are expected to support the economy. However, European equities are suggested to be underweight due to historical underperformance during periods of global activity weakening.
23. Investment Opportunities: Despite the challenges, there are opportunities for investors. The technology sector in Europe may present opportunities related to infrastructure build for generative AI. Leading semiconductor equipment manufacturers and select electrical equipment providers could benefit. Luxury stocks with strong growth, brand momentum, and reasonable valuations are also favored. European industrial stocks positioned for decarbonization, automation, and onshoring trends are seen as positive long-term prospects.
24. Bank of Canada (BoC): The BoC has raised the overnight lending rate, and the focus is on the health of the consumer. While the economy has proven resilient, cracks are starting to form, with declining job openings and rising consumer delinquency rates. The increase in the domestic stability buffer aims to ensure sufficient capital for banks in times of financial stress. Canadian bank equity valuations appear inexpensive, but catalysts for significant valuation improvements are uncertain.
25. Bank of England (BoE): The BoE has implemented a shock interest rate hike, signaling deep concern about inflation. The central bank is open to delivering more hikes, although multiple 50 basis points moves are not the base case. The peak policy rate could reach 5.50%-5.75%. However, a Bank Rate of around 6% could potentially lead to a recession. The increase in mortgage rates could negatively impact households and further squeeze finances.
26. Consumer spending remains strong: The economic data indicates good levels of consumer spending, which suggests that consumers have money to spend and are likely to continue doing so. This can have a positive impact on the economy.
27. Labor market remains tight: Despite a slight increase in the unemployment rate, the labor market is still considered tight. This means that employers may continue to face challenges in finding skilled workers, which could lead to rising wages.
28. Service-oriented businesses are in high demand: As pandemic restrictions ease, service-oriented businesses like restaurants and air travel are experiencing high demand. This can lead to increased hiring and rising wages in these sectors.
29. Manufacturing sector in mild recession: The data indicates that the manufacturing sector is currently in a mild recession, potentially due to a decrease in consumer demand for manufactured goods as people shift their spending toward services.
30. Central banks are likely to maintain tight monetary policies: Major central banks, such as the Federal Reserve and the European Central Bank, are expected to keep policy rates higher for longer due to inflation. The focus on inflation may lead to further rate hikes in the near future.
31. Developed markets may experience a mild recession: There are indications that a mild recession has already occurred in the United States and the euro area. The impact of rate hikes on economic activity will be assessed through PMI data. The tightening bias of central banks and potential trade-offs between growth and inflation suggest a challenging economic environment.
32. Emerging markets may see policy loosening: In contrast to developed markets, emerging market central banks have already started hiking rates and may be closer to the end of their tightening cycles. Falling inflation in emerging economies, such as China, may create room for central banks to ease monetary policy. This makes emerging market debt, particularly local currency debt in countries like Brazil and Mexico, attractive.
33. Sticky inflation will persist: High inflation, driven by wage pressures and supply constraints, is expected to persist into the next year. Central banks will likely be constrained in their ability to cut rates due to the need to combat inflation. Short-term government bonds are favored as interest rates are expected to stay higher for longer.
34. Market volatility and reevaluation of economic damage: The heightened macro and market volatility requires continuous assessment of market pricing and the potential economic damage caused by central bank actions. Recession risks and the changing correlation between stocks and bonds suggest a need for a reassessment of investment strategies.
35. Short-term government bonds preferred over long-term government bonds: Short-term government bonds are considered more attractive for income and capital preservation in the current environment of tighter credit and financial conditions. Long-term government bonds may not provide the same recession protection as in the past, as central banks may not respond with rapid rate cuts.
36. Inflation-linked bonds are favored: Given the expectation of persistently higher inflation, inflation-linked bonds are overweighted on both tactical and strategic horizons. This investment approach aims to benefit from the impact of inflation on fixed income investments.
37. "Soft landing" scenario: The data suggests that there is confidence in a "soft landing" scenario for the U.S. economy, in which the Federal Reserve manages to bring both growth and inflation back to moderate, sustainable levels without causing a recession.
38. Moderating labor demand: Leading indicators of labor demand, such as job openings and temporary help services employment, suggest a cooling of labor demand ahead. This indicates a potential decline in employment growth and a possible increase in the unemployment rate.
39. Interest rate cycles: Interest rates tend to follow predictable patterns within the business cycle. Currently, the data suggests that rates may have peaked, and there is a possibility of rate cuts in the future as the economy moves into a recession.
40. Duration positioning: Considering the current business cycle dynamics, there may be opportunities to extend duration in portfolios, particularly towards the end of the expansion when rates may have peaked. However, there are risks associated with increasing duration, such as high inflation and heavy Treasury bill issuance.
41. Rebalancing towards defensive investments: Economic indicators suggest that a rebalancing towards more defensive investments may be prudent as markets bid up risk assets on hopes of a "Goldilocks" economy. This indicates a shift in investment preferences towards safer options in anticipation of potential market downturns.
42. Impact of heavy Treasury bill issuance: The heavy issuance of Treasury bills may have differing effects on the rate environment. It may put upward pressure on rates, particularly on the short end, but the overall impact on longer-term interest rates may be limited due to available funds and liquidity.
43. Recession outlook: Based on historical patterns, an inversion of the yield curve (short rates higher than long rates) often precedes a recession. The data suggests that the Fed is nearing the end of its rate hike cycle, and a recession is likely to occur in the first half of 2024.
44. Market Volatility: The market is expected to experience some volatility in the near term due to stretched positioning and potential risks from the upcoming earnings season and macro concerns.
45. Earnings Season: The upcoming earnings season for 2Q'23 is expected to show a YoY decline of 5.3% for the S&P 500. Although the pace of deceleration has slowed, there have been downward revisions in aggregate earnings. This could pose a near-term risk for the markets.
46. Valuation and Investment Options: The relative valuation of equities compared to other investment options, such as cash and fixed income, is at extremely low levels. This suggests that the upside potential for equities in the near to mid-term may be limited.
47. Fear Indicators: Traditional fear indicators, such as the VIX and Put/Call ratio, are currently showing high levels of complacency in the market. However, if leading economic indicators weaken further or fear indicators pick up, it could cause increased volatility for equities.
48. U.S. Dollar and Emerging Markets: The next move for the U.S. Dollar could be pivotal for Emerging Markets. A sustained move lower in the Dollar could be positive for Emerging Markets, while a breakout to the upside could pose a headwind. The U.S. Dollar is currently forming a basing pattern and is oversold.
49. Technology Sector: The Technology sector's price performance remains strong, nearing a breakout of all-time highs. However, the sector is deeply overbought, and a move higher in the 10-year yield could lead to a P/E valuation correction. Other sectors may need to broaden out for sustained equity market gains.
50. Health Care Sector: The Health Care sector has shown some broadening out and relative performance improvement. While relative EPS will need to firm for the sector to outperform, attractive valuation and recent broadening are positive factors to watch for the sector.

U.S.:

• The Nasdaq Composite suffered its first weekly decline in two months.
• The S&P 500 Index recorded its first drop in six weeks.
• The Russell indexes were rebalanced on Friday.
• The Fed Chair, Jerome Powell, stated that policymakers expect it will be appropriate to raise interest rates somewhat further by the end of the year.
• The Fed's Summary of Economic Predictions revealed that a majority of policymakers expect at least two more quarter-point rate hikes in the coming year.
• The S&P Global gauge of U.S. manufacturing activity fell back to its lowest level since December.
• Suppliers were cutting prices at the fastest pace since May 2020.
• Weekly jobless claims hit 264,000, matching the previous week's number.
• Housing starts came in at their highest level in over a year.
• Sales of existing homes surprised modestly on the upside.
• The FDIC continued to unload munis acquired from distressed banks.
• Municipal bonds outperformed over the week.
• The Bank of England and Norway's central bank accelerated their pace of rate hikes.

Europe:

• The pan-European STOXX Europe 600 Index fell 2.93%.
• Germany's DAX dropped 3.23%.
• France's CAC 40 Index slid 3.05%.
• Italy's FTSE MIB lost 2.34%.
• The UK's FTSE 100 Index declined 2.37%.
• The Bank of England raised its key interest rate by half a percentage point to 5.0%, the highest level since 2008.
• Headline annual consumer price growth in the UK remained at 8.7%, and core inflation rose to a 31-year high of 7.1%.
• Norway's central bank increased its key interest rate to 3.75%, the highest level since 2008.
• The Swiss National Bank raised its benchmark interest rate to 1.75%.

Japan:

• The Nikkei 225 Index fell 2.7% and the TOPIX Index finished 1.6% lower.
• Japan's core consumer inflation rose by 3.2% year on year in May.
• The yield on the 10-year Japanese government bond fell to 0.36%.
• The yen weakened against the U.S. dollar.

China:

• The Shanghai Stock Exchange Index fell 2.3% and the Hang Seng Index declined 5.74%.
• Chinese banks lowered their loan prime rates.
• Beijing announced a tax break package for consumers purchasing new electric vehicles.

Other Key Markets:

• The Turkish central bank raised the one-week repo auction rate by 650 basis points to 15%.
• Chile's central bank kept its monetary policy rate unchanged at 11.25% but two board members voted for a rate cut.

Past week:

1. US inflation: Consumer inflation in the US is showing signs of moderation, with the consumer price index at its lowest level since late 2021. This suggests that inflationary pressures may be easing, which could have a positive impact on the overall economy.
2. Equity markets: The US stock market is expected to continue its rally, supported by favorable inflation and growth signals. The S&P 500 Index has been experiencing a prolonged period of daily gains, indicating positive market sentiment.
3. US Federal Reserve: The Federal Reserve's recent decision to hold the federal funds target rate steady indicates a "skip" rather than a long-term pause in rate hikes. The median rate projection suggests the possibility of two more quarter-point hikes by the end of the year. However, Fed Chair Jerome Powell's comments during the press conference were interpreted as slightly more dovish, emphasizing that rate decisions will depend on incoming growth and inflation data.
4. Bond markets: Despite the Fed's policy announcement, the bond markets remained calm overall. Limited issuance and stable credit spreads were observed in most sectors. However, there was increased activity in the secondary market for bank loans, with steady demand for discounted loans and some investors taking profits.
5. European markets: European stock markets, including Germany's DAX, France's CAC 40, Italy's FTSE MIB, and the UK's FTSE 100, experienced gains following the US Federal Reserve's decision not to raise rates. Additionally, hopes for stimulus measures in China contributed to the positive performance.
6. European Central Bank (ECB): The ECB raised its key deposit rate by a quarter-point to 3.5%, signaling continued monetary tightening. The ECB also revised its inflation forecasts upward while lowering estimates for economic growth. The central bank confirmed its plan to stop reinvesting the proceeds of its asset purchase program from July.
7. Japan stock market: Japan's stock market, including the Nikkei 225 Index and the TOPIX Index, recorded strong gains. The Bank of Japan's decision to maintain its ultra-loose monetary policy as expected supported the market. Strong export and machinery order data also boosted sentiment.
8. Bank of Japan (BoJ): The BoJ left its ultra-loose policy unchanged, including the short-term interest rate and the yield curve control program. While inflationary pressures have increased, the BoJ maintained its projection that inflation will decelerate in the future, citing cost-push factors and the early stages of moderating inflation.
9. China stock market: Chinese stocks experienced a surge after the People's Bank of China (PBOC) cut several interest rates, raising hopes for additional stimulus. Weakening economic indicators, including industrial output, retail sales, and fixed asset investment, suggest a slowdown in China's economic activity.
10. Property sector in China: The property sector in China showed signs of stabilization earlier in the year but recent data indicates a slowdown in the recovery momentum. New home prices grew at a slower pace in May, and property investment and sales fell sharply. Calls for more stimulus in the sector have emerged.
11. Czech Republic: Inflation in the Czech Republic remained high in May, but it was slightly below the central bank's forecast. While no immediate changes to monetary policy are expected, cautious rate cuts toward the end of the year could be considered.
12. Turkey: The newly appointed individuals in Turkey's government suggest a potential adjustment to the current economic policy framework. This may indicate a return to a more orthodox policy approach, addressing challenges such as unsustainable external account dynamics, unanchored monetary policy, and a widening budget deficit.
13. The Federal Reserve (Fed) is likely to continue its cautious approach by closely monitoring inflation and economic conditions before making further decisions on interest rates.
14. The Fed's decision to pause on rate hikes is seen as prudent due to the downward trend in inflation and signs of a softening economy.
15. The stock market rally is expected to continue, fueled by the outlook of a less-aggressive Fed and anticipation of an end to the tightening cycle.
16. While the market may experience hiccups and temporary soft patches due to shifting expectations for Fed moves and changes in stock market leadership, long-term investors can take advantage of buying opportunities and proactively rebalance their portfolios.
17. The Fed's pause in rate hikes does not necessarily indicate a permanent halt, and the Fed has emphasized its intention to hike rates further in the coming months.
18. The Fed will closely monitor inflation expectations and financial conditions to ensure that they do not loosen prematurely and risk reigniting inflation pressures.
19. The market's positive reaction to the Fed's announcement reflects the interpretation that additional rate hikes may not be necessary, and the end of the hiking cycle is in sight.
20. Investor sentiment has grown somewhat complacent, leading to elevated valuations and the potential for temporary soft patches in the market.
21. The longer-term path of the market will be guided by an eventual bottoming and rebound in the economy and corporate earnings, while the short run may be influenced by evolving Fed commentary and changes in stock-market leadership.
22. Proper expectations for bouts of volatility and a focus on the broader bull market can provide opportunities for long-term investors.
23. Emerging market equities: It is not yet the time to be more constructive on emerging market equities. A sustainable global cyclical upswing that benefits emerging markets still seems elusive. The nominal growth advantage that EM companies have enjoyed in the past appears to be diminished. However, if there is a cyclical pickup in global growth, it could benefit relative EM equity performance.
24. Foreign investment in the US: The US is attracting a significant amount of foreign direct investment (FDI) and is emerging as a leader in the global scramble to redraw supply chains. No country in the world, including China, attracts as much FDI as the US. This trend is driven by factors such as the vast and wealthy consumer market, ease of doing business, skilled labor pool, transparent rule of law, and government incentives such as infrastructure spending and tax credits.
25. US manufacturing base: America's manufacturing base is undergoing a transformational do-over, fueled by massive government spending and foreign firms wanting to be part of the action. The Biden administration's legislative packages, including infrastructure investments, semiconductor manufacturing support, and incentives for clean technologies, are attracting foreign firms to invest in the US. This transformation presents potential investment opportunities and economic growth.
26. Market breadth: There is a concern about narrow equity market breadth, particularly when a few heavily weighted stocks drive most of the year-to-date gains in the S&P 500 Index. Narrow market breadth refers to a situation where only a small number of stocks are participating and moving in the same direction as the overall index. This can be an indicator of potential risks or imbalances in the market.
27. Geopolitical risk: Geopolitical risks, especially those associated with China, are a significant factor impacting emerging markets. There are concerns about the geopolitical risk overhang and the weight of China in EM indexes. Investors need to consider country and stock selection to mitigate these risks. Some investors are exploring EM exchange-traded funds that exclude China, reflecting the debate on whether China is investable.
28. Global cyclical momentum: A sustainable global cyclical upswing that benefits emerging markets seems unlikely in the near term. Global growth remains weak, with Europe in a recession, China facing challenges, and the US potentially heading into a recession. Commodity prices also suggest a weaker global demand backdrop, which could impact commodity-exporting emerging markets.
29. US dollar and EM performance: The US dollar is overvalued by medium-term valuation metrics, and a weaker dollar could be a potential tailwind for emerging markets over the next few years. However, the performance of emerging markets is not solely dependent on the US dollar but also influenced by factors such as nominal GDP growth, earnings, and geopolitical risks.
30. The likelihood of a soft landing in the current Fed tightening cycle is low. A recession is expected to occur before inflation is under control. This implies that the Federal Reserve's attempts to balance growth and inflation are likely to be challenging.
31. Some institutions recommend a defensive investment strategy, favoring high-quality large-cap U.S. stocks over economically sensitive smaller caps and non-U.S. stocks. In bonds, a barbell strategy is suggested, with investments in shorter-maturity bonds and longer-term bonds.
32. The market has experienced a narrow rally fueled by mega-cap technology-related stocks, while the average stock has performed poorly. This market narrowness is rare and is likely to correct in the future. However, it is unclear when or how this correction will happen.
33. The futures market is not necessarily expecting rate cuts by the end of the year but rather hedging against the possibility of a financial shock that could force the Fed to cut rates.
34. Saudi Arabia, as the de-facto leader of OPEC, has announced production cuts in a bid to stabilize oil prices. This commitment to stabilizing prices, even at the cost of reduced market share, indicates a unified and strong OPEC. These production cuts may help offset the effects of lower demand during an expected recession and support oil prices.
35. The office property market is facing challenges, including shifting worker preferences, tighter lending market, and rising debt costs. The vacancy rate for the U.S. office property type has been steadily increasing, suggesting potential weakness in tenant demand. However, other property types such as Industrials continue to exhibit relative strength despite the rising interest rate environment.
36. The Federal Reserve is expected to provide more clarity on the trajectory of interest rates in the upcoming meeting. The market expectations have been fluctuating, with a 28% probability of a rate hike in June and a 54% chance of a skip in June followed by a hike in July.
37. Given the gradual slowdown in growth and inflation and the fact that the full impact of the cumulative 500 basis points (bps) of rate hikes has not been realized yet, it is advised for the Fed to pause at this point and not raise rates. However, the possibility of another rate hike is still on the table, and Chairman Powell may emphasize that skipping a rate hike now doesn't mean the Fed is done raising rates.
38. Regardless of the Fed's decision and messaging in the upcoming meeting, there is an expectation that rate cuts will occur within the next year. These rate cuts are expected to improve the investment backdrop across a broad range of assets.
39. The S&P 500 price momentum suggests a potential return to highs, indicating a possible end to the bear market. However, there is skepticism about the ease of this recovery, and further work needs to be done.
40. The economy is expected to weaken further, and there is a base case prediction that a recession may develop later in the year. Leading indicators and the yield curve indicate potential weakness ahead. Despite this, there is a belief that the lows have been reached, and any pullbacks in the market could present buying opportunities.
41. The S&P 500 is currently overbought, indicating a potential period of consolidation and choppiness in the market.
42. Resistance levels for the S&P 500 are identified at 4370-4380 and 4431, while support levels are seen at 4200 and the upward sloping 50-day moving average (DMA) around 4167.
43. Inflation remains a key factor influencing market sentiment and the path forward for the Federal Reserve. Despite some moderation from peak levels, inflation is still elevated, and the Fed may need to take further action, including possible rate hikes, if inflation doesn't cool more.
44. The performance of specific sectors is highlighted, such as the dominance of Tech heavyweights and the need for broader market breadth for sustained upward movement. The momentum in banks and Japanese equities is also mentioned as potential areas of interest.
45. Equity markets: Despite some troubling indicators, such as an inverted yield curve and low volatility, the stock market has reached fresh highs. The market perceives an economic soft landing and improvement in corporate earnings trends as more likely. However, there are still elevated recession risks according to leading economic indicators.
46. Bank of Canada: The Bank of Canada is expected to continue raising interest rates due to stronger-than-expected economic data. The inflation data and low unemployment rate support the view that the Bank of Canada will maintain a tightening path. However, a change in the inflation picture may be needed to alter the current trajectory.
47. European Central Bank (ECB): The ECB has recently hiked rates and signaled the cessation of reinvestments under its Asset Purchase Program. The higher inflation narrative and upward revision in inflation forecasts indicate a possibility of more rate hikes in the future, potentially reaching 4%.
48. Bank of England (BoE): The BoE is expected to raise rates to 4.75% at its meeting following strong labor market data, services inflation, and private sector pay growth. The UK economy has shown resilience and is forecasted to experience continued growth.
49. Asia Pacific Market: The Asia Pacific equity market is on track for consecutive weeks of gains, driven by supportive policies from China. The People's Bank of China has cut short-term interest rates and is expected to implement further stimulus measures to encourage household consumption. The Japanese yen has weakened against the US dollar, and the Bank of Japan is likely to maintain its easing policy.
50. Toyota: Toyota Motor Corp. aims to sell a significant number of electric vehicles (EVs) annually by 2026 and 2030. The company's commitment to EVs and its sales targets have been positively received by investors, resulting in a surge in Toyota's shares.
51. Equity markets: The overall outlook for equity markets is improving in the longer term. However, a short-term pause or pullback is expected due to the recent surge and approaching technical resistance levels. Potential support levels for the Nasdaq include 13,150 and 12,427, while the S&P 500 may find support around 4,300 and 4,200-4,155.
52. Market participation: As many growth stocks have advanced and are nearing resistance levels, there is an expectation that participation will broaden to other areas of the market. Sectors such as industrials show increasing evidence of bottoming at key support levels, indicating potential opportunities for participation.
53. S&P 500 equal-weighted index: While a few mega-cap technology stocks have been leading the gains in the S&P 500, it is important to note that other stocks are also showing signs of improvement. The S&P 500 equal-weighted index (SPW) is cited as an indicator of broad-based participation. The recent recovery in the Russell 2000 small-cap index and the SPW, along with improvement in sectors like industrials, suggest a potential broadening of market participation.
54. S&P 500 Industrial sector: The S&P 500 Industrial sector is showing noteworthy technical improvement despite concerns about the economy. The weekly momentum indicator is turning up, indicating a positive development and potential upside over the next 2-3 months. Price trend analysis suggests a transition from a bear market to a narrow trading range, with a potential breakout to new cycle highs in the coming months. Relative performance versus the S&P 500 is also showing early signs of bottoming, indicating potential participation in the sector if market breadth expands.
55. Market Volatility: The new regime characterized by heightened macro and market volatility is expected to continue. This volatility is driven by factors such as supply constraints, inflationary pressures, and structural changes shaping returns.
56. Market Opportunities: Traditional broad market moves may not be as effective in generating returns in the current environment. Instead, investment leaders suggest focusing on more granular investment opportunities that consider relative pricing divergences across sectors and regions.
57. Emerging Markets: Emerging market (EM) stocks are considered to better price in the economic damage expected from rate hikes compared to developed market (DM) peers. Factors such as China's economic restart, the end of EM hiking cycles, and a weaker U.S. dollar are seen as potential benefits for EM stocks and local currency debt.
58. Megaforces Shaping Returns: Structural changes, or "megaforces," are expected to play a significant role in shaping returns. These include the widening disconnect between bond and stock pricing, the potential widespread adoption of artificial intelligence (AI), aging populations, geopolitical fragmentation, and the transition to a lower-carbon economy.
59. Inflation and Monetary Policy: Core inflation remains stubbornly high, and supply constraints limit economies' ability to produce without sparking inflation. As a result, central banks are expected to maintain restrictive monetary policy, potentially bringing inflation down but not necessarily to policy targets.
60. Recessions and Asset Pricing: Recessionary conditions are anticipated, but the usual approach of "buying the dip" may not apply in the current regime. The economic damage caused by rate hikes is seen as a key factor in asset pricing, and the extent of this damage needs to be continuously reassessed.
61. Bonds and Fixed Income: Fixed income investments, particularly very short-term government paper, are becoming more attractive for income generation. Long-term government bonds may not provide the same level of protection as in the past due to changing correlations between stocks and bonds and the likelihood of higher policy rates for a longer period. Short-term government bonds are preferred over long-term government bonds.
62. Living with Inflation: Inflation is expected to persist above policy targets in the coming years, driven by factors such as aging populations, geopolitical fragmentation, and the transition to a lower-carbon world. This suggests a need to adapt investment strategies to account for ongoing inflationary pressures.
63. Overweight Inflation-Linked Bonds: Given the expectation of persistent inflation, there is a preference for overweighting inflation-linked bonds on both a tactical and strategic horizon.