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ECONOMIC WEEK AHEAD: June 15-19
The week ahead is dominated by the Fed. Kevin Warsh delivers his first press conference as Fed chair on Wednesday, right after the FOMC releases its policy statement and its Summary of Economic Projections (SEP), which includes the Dot Plot showing meeting participants’ forecasts for the federal funds rate. We expect the Fed to abandon its easing bias and pivot toward a tightening bias. The ECB raised its official rate by 25bps last week (chart). The Bank of Japan is set to lift its short-term policy rate from 0.75% to 1.00% on Tuesday, the highest level since 1995. The Reserve Bank of Australia and the Bank of England round out the global central bank docket, though no rate changes are expected. The S&P 500 closed Friday at 7,431.46, comfortably above its 50-day moving average at 7,282.00 and its 200-dma at 6,902.33. The uptrend is intact heading into the meeting. SpaceX began trading on Friday and will continue to dominate headlines this week alongside Warsh's debut. Options on the stock go live on Tuesday. Keep in mind, US markets will be closed on Friday for Juneteenth. Here are the key releases most likely to shape investors' thinking this week: (1) FOMC and the SEP. In recent months, markets have flipped from pricing in Fed rate cuts to pricing in rate hikes, which are expected to start either later this year or early next year (chart). No one expects a rate hike on Wednesday. The only issue is whether the FOMC adopts a neutral or tightening stance. We are in the latter camp since inflation risks are higher than unemployment risks. We admittedly are in the minority. March's SEP had core PCED easing from 2.7% this year to 2.2% next year and 2.0% by 2028 (chart). With recent inflation readings running hot, that glide path looks optimistic. June's SEP will likely show less optimistic projections for the federal funds rate (FFR) over the course of this year and next year compared to March's SEP (chart). June's Dot Plot is also likely to show higher for longer FFR projections than it did in March. (2) Unemployment. Initial jobless claims (Thu) have drifted higher over the past month. The four-week moving average has climbed to 219,000, with the latest week (June 5) at 229,000. Continuing claims were at 1,795,000 with the four-week average at 1,777,000. The recent uptrend in jobless claims is worth monitoring, though it remains well below levels that would signal labor-market stress or an increase in the unemployment rate (chart). (3) Retail sales. May retail sales (Wed) should be strong. The Redbook same-store gauge rose 9.1% y/y for the week of June 5, well above the 5.4% y/y reading for official retail sales excluding food services, gasoline, and autos in April (chart). (4) Business surveys. The June regional business surveys conducted by the New York Fed (Mon) and Philly Fed (Thu) are the early reads on what June's national M-PMI might be (chart). They should continue to show the economy and manufacturing expanding nicely. (5) Industrial production. Industrial production (Mon) probably rose solidly in May, given the upbeat reading of May's M-PMI (chart).
US MARKET CALL: Roaring 2020s Rockets To Mars & Beyond
"Space: the final frontier. These are the voyages of the starship Enterprise. Its five-year mission: to explore strange new worlds, to seek out new life and new civilizations, to boldly go where no man has gone before!" That's the introduction to Star Trek, the long-running TV series. On Friday, Elon Musk, the CEO of SpaceX, went where no man has gone before. He became the world's first trillionaire. The company's IPO went off without a hitch, raising $75 billion, with its shares rising 19% on their first day of trading. While it was the largest IPO ever, it was a drop in the bucket given that the Wilshire 5000 has a $74 trillion market cap (chart). We congratulate Elon on his remarkable achievement. We do have some advice for him, however. First and foremost, there is absolutely no reason to go to Mars. There is nothing up there. Second, it makes much more sense to locate data centers on the ocean floor than in outer space. It will be much easier to install and repair them. They will get damaged by space debris if they are put in orbit. Third, we also suggest that Tesla offer a hybrid model to boost that company’s sales. Providing some rocket fuel to the SpaceX launch on Friday was news that the US and Iran might sign a memorandum of understanding (MOU) on Sunday. It could turn out to be a memorandum of misunderstanding (MOMU). Nevertheless, the price of a barrel of Brent crude oil fell to $87.33 on Friday (chart). Iranian officials said today that they won’t be ready to sign on Sunday. Contributing to the fall in oil prices was news that the US military is escorting ships carrying approximately 7 million barrels a day of crude oil and fuel products through the Strait of Hormuz. Energy Secretary Chris Wright said so Friday. That news also lifted the S&P 500 and Nasdaq slightly on Friday. Both rebounded off their 50-day moving averages. The stock market has been rocketing on fabulous earnings momentum (FEMO). Analysts' consensus expected long-term earnings growth (LTEG) jumped again to 24.0% at an annual rate for the next five years during the week of June 12 (chart). That's a record high and twice as fast as the average of this series since 1985. It's also as unlikely to be achieved as colonizing Mars. More realistic is the S&P 500 forward earnings per share, which rose to yet another record high last week. It is up to $366.92, which is a time-weighted average of the current analysts' consensus EPS estimates for 2026 and 2027, at $340.39 and $397.87 (chart). Those are also supercharged estimates compared to our current forecasts of $330 and $375. In any case, FEMO is spreading. The forward earnings of both the S&P 400 MidCap and S&P 600 SmallCap have been rocketing to new highs, along with that of the S&P 500, in recent weeks (chart). Notwithstanding our FEMO story, we've been predicting since June 3 a June Swoon that might present a good buying opportunity. It might have happened on June 5, when the S&P 500 fell 2.6% on a much better-than-expected May employment report. That increased the odds that the FOMC might pivot toward a tightening stance at Wednesday's meeting, which has been our contrarian view since early May. The Magnificent-7 stocks certainly have swooned so far this month, especially compared to the rest of the S&P 500, a.k.a. the Impressive-493 (charts). One possible reason is that investors might have raised some cash to buy SpaceX by taking profits in the Mag-7. Investors might also be concerned that businesses are tightening their AI budgets, forcing the AI suppliers to lower their prices for "tokens." So is the June Swoon over now that the SpaceX IPO has launched successfully? We see reasons to think so. A MOU between Iran and the US could push the stock market higher as it pushes oil prices still lower. The FOMC's doves could use such a development to push back against the committee's hawks. We are still leaning toward a tightening pivot in the FOMC's Wednesday statement; however, we acknowledge that recent events increase the odds of a neutral stance as well as a resumption of the bull market to fresh record highs.
Bull Jumping In Crete
Greetings from Greece. My colleagues, Elias and Toby, have been writing the QTs this week while my wife and I are vacationing in Crete and Santorini. The weather, food, and people are great. In Crete, we visited the ruins of the Palace at Knossos. It was the ceremonial and political center of the Minoan civilization and culture that thrived during the Bronze Age. We learned that for fun, Minoans enjoyed bull jumping. In Greek mythology, Zeus was born in Crete. In addition, the Minotaur, who was half human and half bull, was confined by King Minos of Crete to dwell in the Labyrinth, designed by the architect Daedalus and his son Icarus. Icarus died by flying too close to the sun, which melted his wax wings. (1) Markets. Today’s bull market in stocks has raised concerns that investors are flying too close to the sun and are in for a meltdown like Icarus’. We try not to be bullheaded, but we think that the earnings-led bull market will continue at least through the end of the decade. We think that June’s Swoon so far is more likely to be a rotation than a correction (chart). The S&P 500 bounced off its 50-day moving average today on news that President Donald Trump decided to postpone a planned attack on Iran. He subsequently said that a deal to end the war is imminent. Iran has yet to confirm this. While the Magnificent-7 companies mostly continue to deliver fabulous earnings momentum (FEMO), investors aren't sure that they can sustain it given their enormous AI capex. In addition, there is lots of uncertainty about the AI investments’ payoff. Recently, LLM providers have had to lower the prices of their "tokens" in response to pushback by business users at the high cost of using AI tools. In recent weeks, the Impressive-493 collectively have outperformed the Magnificent-7 stocks (chart). The latter might also be getting hit by profit-taking by investors participating in tomorrow's gigantic SpaceX IPO. The MAGS ETF is down 2.6% ytd, while the XMAGS is up 9.4% (chart). Another reason we don't expect the current June Swoon to turn into a correction is that our two favorite Bull-Bear Ratios remain subdued (chart). We tend to get concerned when there are too many bulls. By the way, a couple of days ago, when the price of gold dropped below its 200-day moving average around $4,500, we concluded that it was likely to fall further and find support at $4,000 (chart). We still think that, expecting it to bounce off that level and resume the bull market that began in late 2022. We would have to seriously reconsider our current stance should the price fall below $4,000. (2) Inflation. The US PPI inflation rate jumped sharply in May. Headline PPI for final demand rose 1.1% m/m for the second consecutive month. The y/y inflation rate soared to 6.5%, the fastest pace in more than three years (chart). PPI goods’ final demand surged 2.8% m/m, the largest one-month advance on record, lifting the y/y rate to 10.4%, the highest since October 2022. PPI services’ final demand inflation remained elevated at 4.9% y/y. The acceleration in inflation was driven overwhelmingly by a 10.7% m/m rise in energy prices, while transportation and warehousing costs increased by 2.6%. Additionally, food prices saw a three-month-high increase of 0.6% m/m, as fertilizer prices skyrocketed by 28% y/y. (3) Economy. Meanwhile, the economy continues to roll along. The Weekly Economic Index rose to 3.2% y/y, its highest reading since September 2022, consistent with real GDP growing at around 3.0% y/y (chart). The Atlanta Fed GDPNow tracking model revised its Q2-2026 real GDP estimate higher this week, from 3.0% to 3.3% (chart), with real consumption growth revised up from 2.4% to 2.5% and real gross private domestic investment growth from 9.3% to 10.2%. Initial unemployment insurance claims rose to 229,000 for the week of June 5, pushing the 4-week moving average to its highest reading since February. However, this series remains low. Continuing claims rose slightly to 1,795,000, but the 4-week moving average remains near its lowest level since January 2024 (chart). (4) Credit. In the past, recessions were typically caused by credit crunches. Currently, the private credit market is showing signs of stress, but bank lending continues to expand. Large banks' loans increased 7.7% y/y in May, the strongest pace since the middle of 2023 (chart). Small banks' loans rose at a more muted 4.7% y/y.
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