As we bid farewell to the first half of the year, the month of July has greeted us with successive displays of fireworks, captivating audiences for two consecutive weeks now. During this time, the talking heads of the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB), and Federal Reserve (Fed) met in Sintra, Portugal where they expressed unanimous agreement that consumers in these major economies remain strong, resilient and employed, hence, showing no evident signs of an impending recession (minor awkward silence from BOE’s Andrew Baily during this part of the conversation). Overall, the messaging was consistent across the board: ”core inflation remains elevated but data dependency is key for an accurate assessment of the true state of the economy and further evidence is needed to determine the trickle down impact of aggressive rate hiking by all central banks” (excluding Japan which is not part of the herd and has become the poster child economy amongst academics).

Markets welcomed the 1st day of summer with a sour tone as all major indices eked lower on the week, primarily driven by softer data out of China, suggesting their recovery may be slower than anticipated. Similar recessionary effects were stoked when the BoE surprised markets with a 50bp rate hike spreading fear through Europe and global economies with yet another flight to safety. Metals and commodities were under heavy selling pressures on these macro events with Gold only recently finding better support along with most fixed income instruments rallying across the board. The Panama Canal bottlenecks caused by low rainfalls along with domestic inventory draws were not enough to stabilize the fall in Crude prices which traded -5%, while LNG is closing 1.5% lower on the week. Summer seasonal effects continue to set in and are leading to further vol compression as markets coil into their ranges in stubbornly choppy trading conditions.

“Every economist for themselves”!

With CPI [YoY] cooling to 4% on Tuesday, the FED finally displayed some prudence during this week’s FOMC meeting and unanimously held monetary policy rates between 5-5.25% for the first time in 10 prior rate decisions. However, their tone remained hawkish and signaled additional hikes would be necessary into year end while presenting the most distorted dot plot a group of PhD’s has fathomed in recent history.

One takeaway from this lack of consensus is that the FED has pushed rates as far as they could before rendering their current predictive models useless in this multi-faceted economic conundrum. In response, markets called “bluff” and fueled a buy everything rally suggesting the end of rate increases for J. Powell’s administration in spite of inflation remaining above target levels of 2% for the time being.

School’s out, market drought! Top heavy mega-caps took a breather from their recent climb as risk assets favored some long awaited rotation into lagging sectors of the economy. Cyclicals found a bid on what was another choppy and light volume week while Financials partially recovered their earlier year losses as the SEC turned the heat onto several larger players in the cryptocurrency space. The US dollar weakened vs majors upon the debt ceiling resolution and rates markets traded in a relatively tighter range versus prior weeks. In spite of light economic data reported: Services PMI, ISM and Jobless claims all further support the case for the FED to deliver a June pause next week.

A shortened holiday week into May month end brought forth aggressive moves in US fixed income markets with yields swinging between 20-40bps intra week on the curve. The culprits were predominantly FED speak commentary heading into their blackout period with a “June Pause” consensus starting to form by some members. Although a hawkish tone remains in the air, both Powell and his vice chair expressed prudence on raising rates for this June 14th meeting.

It’s possible that the known lack of liquidity during the upcoming summer months and the added complexity of putting out fires remotely from the golf course would hurt their A game, then again, it’s fair to assume that 500+ bps hikes may actually be carrying some tailwinds for the economy. Regardless of the reason, Mr. Market liked the thought of pausing and June opened up with a banger bounce in every left for dead (read Non AI Tech) risk asset out there. As expected, signs of resolve emerged out of political leadership in regard to a debt ceiling agreement which has now been passed to the Senate with a low likelihood of encountering any further hurdles. Their 60 vote threshold should easily be cleared by members ahead of schedule.

We mentioned market fatigue and dislocations as correlations were breaking down over the last few weeks. Well, this not only continued, but this morning I received an AI stock pick from a barista rocking a killer mustache…talk about a real life head and shoulders pattern (still, I’m not one to short a good stache or an innovative US leading co and clear untouchable force in this wild market environment). Perhaps the short and what few speak about are the millions of jobs AI and related technologies are about to overhaul in our economy. More to follow on this…

What few have discussed amidst the turmoil are the lurking signs of contango appearing in commodity markets. Given low or ever-decreasing inventories levels and assuming minimal carry costs for these, the upward sloping forward curves suggest that future prices (inflation expectations) will remain elevated and/or that supply disruptions are on the horizon (further supporting the Feds case for additional rate hikes). It’s worth noting that supply side economics are not typically resolved by central bank intervention; but by policy, capex, incentives, efficiency, trade, infrastructure and regulation (or de-regulation in some cases). As of now, the only card in play is demand destruction (which is causing pain but no obvious gain).

The combined effects of debt ceiling concerns and the Federal Reserve’s hawkish commentary by some members this week contributed to selling pressures across the entire Treasury curve cheapening rates by roughly 25bps. [UST’s currently at 4.26%, 3.70%, 3.65% and 3.90% for 2,5,10 and 30yr terms, respectively]. While front end rates remain reluctant to reevaluate, insisting there will be interest rate cuts into year end, the high quality Mega cap names continue carrying major US indexes to the green. If for no other reason, the tech rally this week has been in part thanks to the relentless use of the term “AI” percolating through the media which has further extended the dislocation of the QQQs from all other benchmarks. While the rest of the market fights to tread water, signs of fatigue and near-sightedness are setting in and becoming evident.

Political induced fear has been the rhetoric all week as the June 1st debt ceiling deadline approaches. Will this be the year the US decides to default on its obligations and chooses to become a third world economy? Unlikely. Interestingly though, is the recent re-pricing in 4wk Bills cheapening as this tug-o-war continues. Although, the US remains volatile and difficult to navigate in the near term and as erratic as many areas of the market may seem, data continues to suggest that the Feds actions on reducing inflation are working. We expect to see a clearer picture for markets in the weeks to follow which should finally allow price action to breakout of the tighter ranges we’ve been in.

Another 25bp rate hike and a sour taste is what Fed chair Jerome Powell left markets with this week. Their statement was direct and left little to read into, “…data dependent from here on out, getting to 2% target is going to take a while”. With that, markets continued to purge out of risk assets throughout the week and yields moved lower across the curve as other regional banks admitted to liquidity draws and markdowns (PacWest and First Horizon this time). Although we approach the end of the hiking cycle, positioning in this market seems to be setting up for a sideways summer that is unlikely to change course in the absence of economic data that doesn’t reflect a significant and sustained improvement in inflation. In the meantime, fearful depositors and higher for longer rates are proving to be the regional undertakers.

April showers, will Powell allow May flowers? An end to another range bound month in financial markets where softer economic data begins to trend and public companies prove to be navigating smoothly through the storm with Q1 earnings surprising to the upside. A flight to quality continued this week causing mega caps to soar high enough to keep the broader US indices afloat for the month, meanwhile support for the rest of the market has been non-existent, with null risk appetite, lack luster volumes and persistent downside momentum awaiting the May 3rd Fed rate decision. Additionally, we saw another wave of liquidations, banking contagion and recessionary pricing further pressuring an already weak market and maintaining a strong bid under short duration instruments.