Wall Street Extends Its Rally After Cooler-Than-Expected Inflation and Fed Pause

US inflation, proxied by the Consumer Price Index for All Urban Consumers, rose at a 4% annual rate in May, before seasonal adjustment. This is the lowest level in two years, in line with consensus estimates. Moreover, the University of Michigan's gauge for one-year inflation expectations in the United States eased to 3.3% in June, down from 4.2% the month before. This is the lowest level since March 2021.

Against this backdrop, the Federal Reserve kept rates steady this week, but flagged two more hikes this year to tame inflation and bring it down to the theoretical level of 2%. Amid weak macroeconomic data and cooling inflation, investors may have doubts about the relevance of this super hawkish monetary policy that runs the risk of tipping the economy into recession.

Stock markets saw the glass half full. The S&P 500 and Nasdaq hovered near 14-month highs, shrugging off concerns about further interest rate hikes that the Fed forecast on Wednesday. The tech-heavy Nasdaq Composite gained 3.25%, extending its winning streak to 8 weeks. This brings its year-to-date performance to 30.79%. The S&P 500 rose 2.58% (+14.85% YTD). It’s worth noting that big tech is largely fuelling the benchmark's performance in 2023. Just seven stocks, the top seven components of the S&P 500 by market cap, have seen significant gains this year, namely:

• Apple Inc. (APPL): +42.32% (S&P rank: 1)
• Microsoft Corp. (MSFT): +42.74% (S&P rank: 2)
• Alphabet Inc. (GOOG, Class A + Class C): +39.82% (S&P rank: 3)
• Amazon.com Inc. (AMZN): +49.39% (S&P rank: 4)
• Nvidia Corp. (NVDA): +192.13% (S&P rank: 5)
• Meta Platforms Inc. (META): +133.51% (S&P rank: 6)
• Tesla Inc. (TSLA): +111.51% (S&P rank: 7)

Back to the old continent, the European Central Bank (ECB) announced on Thursday its decision to raise euro zone borrowing costs to their highest level since 2008, citing the unyielding grip of inflation and signaling the likelihood of further adjustments in the coming months. The quarter-percentage-point increase marked the eighth consecutive interest rate hike by the ECB, following its previous misjudgment of the tenacity of price surges in early 2022. With this move, the policy rate now stands at 3.5% (for deposit facility) and 4% (for main refinancing operations). Concurrently, the ECB disclosed the termination of remaining stimulus programs initiated during the crisis.

Despite these monetary policy decisions, European equity indexes posted significant gains. The MSCI EMU was up 2.11% for the week (+13.43% YTD) while the FTSE 100 added 1.06% (+2.56% YTD).

In Asia, the Nikkei 225 index notched its tenth straight winning week (+4.47%, +29.17% YTD) after the Bank of Japan held interest rates at ultra-low levels and signalled no change to its quantitative easing and yield curve control policies. The Japanese index hit its highest point since the country’s bubble burst more than thirty years ago.

The Shanghai composite followed suit, with a weekly gain of 1.30% (+5.96% YTD) as the People’s Bank of China began cutting lending rates to support economic growth.

Tech reigns supreme   

Once again, technology and consumer discretionary stocks led gains among the 11 major sectors of the S&P 500. Within the IT sector (up 4.44% week-over-week, +40.89% YTD), Nvidia Corp jumped 10.12% and Microsoft gained 4.76%. The consumer discretionary sector (up 3.15% over the week, +29.16% YTD) was boosted by Tesla stocks, up 6.60%.

Since the beginning of the month, the rally has broadened to include more economically sensitive sectors such as industrials (up 2.95% for the week, +6.92% YTD) and materials (up 3.32% for the week, +4.61% YTD).

By contrast, energy was the only sector that ended the week in the red, down 0.71% (-8.32% YTD), even though the WTI crude oil price rose 2.29%. Despite Saudi Arabia’s announcement to unilaterally slash output by one million barrels a day, crude oil prices remain near their 2023 lows as the US and several OPEC members continue to increase production while demand could be hit by a cloudy economic outlook.

Bitcoin on track to recover   

Cryptocurrency markets experienced another rollercoaster ride following the Federal Reserve's announcement on interest rates, after last week's tumultuous descent triggered by the SEC's legal action against Binance and Coinbase.

The central bank’s rate hike pause could have ignited hopes of a potential bullish turnaround for the cryptocurrencies. However, Bitcoin faced a sharp downturn initially, plummeting below $25,000, as the Fed's economic projections hinted at two more interest rate hikes this year. Surprisingly, the digital asset swiftly rebounded following Jerome Powell's press briefing, as he emphasized that the projections were only estimates. The cryptocurrency recovered to its early June levels around $26,500, neutralizing the impact of recent market turbulence.