Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.
Following five consecutive weeks of gains, the S&P 500 slipped 1.4% last week, in what most people would consider a relatively quiet week regarding economic data. Of note is that after 500bps of Fed rate hikes, the S&P 500 is nearly right in-line with where it was on the eve of the Fed interest rate liftoff in March 2022. Topical, as Fed Chair Powell testified last week to Congress in his semi-annual Monetary Policy Report, “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”
Powell claimed he had not seen significant evidence of an economic impact from tighter lending standards and reiterated that the rate decision at the last meeting wasn’t necessarily a pause (more like a skip that reduces the tightening size). He suggested the June dot plot is a good guide for upcoming policy decisions and that most FOMC participants had a base-case of two additional rate hikes, reinforcing that they could be leaning against inflation with these elevated interest rate levels for an extended period.
In the past year or so, the market has consistently bet the Fed would hike less than the median dots suggested. Market odds for a rate hike at the July meeting currently sit at 69%, with no further tightening after that. By the sounds of last week, the market may need to adjust again, as it is not paying attention to the words and sounds of Fed commentary. Additionally, the base effects, which affect year-on-year calculations and have pulled core inflation lower since March, flip the other way in July. So, the data will likely be less accommodating to current market expectations than it has been in the past couple of months.
Despite the outlook from the Fed, we do not expect long-term Treasury yields to move significantly higher from here. Long-term yields are sensitive to inflation expectations, and since any Fed tightening beyond the aforementioned two rate hikes will be aimed at combating inflation, the Fed’s willingness to continue lifting rates should keep long-term yields from breaking appreciably higher as expectations for runaway inflation should remain tempered.
Data deck for June 24 - June 30: