HIGHLIGHTS
Equities hit a record high this week, mainly driven by the reassurance by the Fed that there will be 3 rate cuts. Fed also raised their growth prediction to 2.1% (Q4/Q4), and neutral rate to 2.6%. 10Y treasury yield dropped after the Federal Open Market Committee (FOMC) meeting.
Rate Cuts: According to the Fed’s forecast, there will be 3 cuts this year despite the higher inflation and gross domestic product (GDP) expectations. Core personal consumption expenditures (PCE) and GDP growth forecast this year were revised up 20bps and 70bps respectively. Markets are pricing in 65% odd of a 25bps June cut.
NIRP: Japan’s negative interest rate policy (NIRP) has ended. However, the Nikkei went up to record high, while the yen dropped sharply this week. Markets are worried that the next hike will not happen in the short term.
IPO: Equity capital markets started picking up this year, after muted issuance in the previous years. Reddit’s IPO performance was strong this week, with the stock opening almost 40% higher than the issue price. The outperformance of high profile deals would fuel hopes for more activities in 2024.
MARKETS
16,428.82 | +2.85% | |
S&P 500 | 5,234.18 | +2.29% |
Dow | 39,475.90 | +1.97% |
10-Year | 4.22% | -8bps |
Brent | 85.58 | +0.33% |
DXY | 104.43 | +0.95% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Goldman Sachs: S&P500 went up 10% YTD and hit our year-end target of 5200 this week. Our baseline forecast is that the S&P500 will end the year unchanged at 5200. The expected rate cut trajectory and economic growth are priced in the market already.
Standard Chartered: We are bullish on equities in the US and Japan. Fed is likely to cut rates even if the inflation rate is above its 2% target. Japan’s dovish stance will keep the yen weak, benefiting Japanese exporters. Both are supporting the equity rally in the US and Japan.
Fixed Income
Morgan Stanley: Credit market is surprisingly resilient at a time of high interest rates and above-average bankruptcy filings. Historically, bankruptcy filings have indicated wider credit spreads and increasing default rates, but the high-yield spreads are at a 20-year low now. Metrics like high-interest coverage drives the disconnect because of the high cash level in many companies and the balance sheets financed at extremely low rates in the COVID-era. Another reason is many small and unprofitable companies can access the swollen pools of private credit capital instead of issuing debt in the public market at high yield.
Goldman Sachs: The Fed’s reiteration of 3 cuts narrow the range of outcomes in the front-end. It suggests that the volatility will continue to drift lower. Stay short in front-end volatility, at least before the easing cycle starts and the Fed reconsiders the neutral rate progresses.
Economy
Barclays: Fed embraced optimism about inflation without sacrificing economic growth, fueling the recent market rally. The FOMC meeting was surprisingly dovish, and the Fed is expected to initiate rate cuts in June.
UBS: The Fed wants to cut rates despite the inflation is dropping slower than expected. We believe that the Fed does not want to mess up the soft landing and will be tolerant of slow disinflation.
KNOWLEDGE TRANSFER
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DISCLOSURE
This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.
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