What We're Seeing: Fed Meeting Sparks Records – 3 June 2024

The Week in Brief

US markets were mixed but modestly higher in early June, with the S&P 500 roughly flat-to-up heading into the Fed meeting. The main event came on June 12, when the central bank kept rates on hold as expected. More importantly, CPI data released the same day surprised to the downside, briefly lifting tech shares to new intraday highs.

The week saw new record closes for both the S&P 500 and Nasdaq after the Fed meeting, even though some of those gains faded by Friday. This pattern of rallying on good news and then consolidating is characteristic of a mature bull market.

The Fed’s Message

The Fed’s decision to hold rates was no surprise. What mattered was the accompanying communication. Policymakers acknowledged the softer inflation data but stopped short of declaring victory. The dot plot showed officials expecting fewer cuts this year than markets had hoped for, tempering some of the enthusiasm.

Bond yields eased slightly after the decision, as the combination of steady rates and cooler inflation reduced near-term tightening fears. The relief was modest, but it helped stabilise the bond market after weeks of volatility.

Sector Action

Financials and energy names outperformed midweek as rate-cut hopes briefly flared. Technology stocks were volatile, swinging on Fed signals and the CPI release. The sector ultimately finished mixed, with chip stocks showing some weakness while software names held up better.

Oil prices held firm, providing continued support for the energy sector. Gold ticked up on global uncertainty, reclaiming some ground after recent softness.

Our Read

The inflation data was the highlight. It suggests the disinflation process is back on track after a few months of stickier readings. This is constructive for risk assets, as it keeps the door open for Fed easing later in the year.

However, we are not complacent. The Fed has made clear it wants to see a sustained trend, not just one or two good prints. The path to rate cuts remains data-dependent, and there is ample room for disappointment if inflation rebounds.

For positioning, we maintain a balanced approach. Tech exposure is warranted given the structural growth drivers, but we are also finding opportunities in value sectors that benefit from the rotation. Quality remains the unifying theme across our holdings.

What Could Change Our View

A reacceleration in inflation would be the main risk. If the next few CPI prints reverse course, the Fed will have no choice but to stay restrictive longer. We would also grow more cautious if earnings guidance weakens as we move into the second half of the year.

This is informational commentary, not investment advice.