June 2023 Market Lookback

The Federal Reserve decided not to hike rates at the June FOMC meeting, after hiking at every meeting since Jan 2022, though they indicated that two more hikes were expected by year-end. Resilient economic data is the explanation for more hikes on the horizon, with jobs gains again coming in above estimates for the 14th straight month. Treasury yields moved higher as implied rate volatility fell to its lowest level in months, while stocks moved higher across major size and style categories. Stock gains were largely driven by expanding valuation multiples, as earnings estimates revisions were down marginally.

Macro

•   The Federal Reserve left the fed funds rate unchanged on Jun 14, though FOMC officials indicated on average, they expect two more hikes by year-end.

•   339k jobs were added in May, above the consensus estimate of 195k, while the unemployment rate rose from 3.4% to 3.7%.

•   The May ISM Services index declined to 50.3, below the estimate of 52.4, on the back of weakening New Orders.

•   Consumer confidence rose in June according to both the University of Michigan & Conference Board, notably surpassing expectations.

•   Q1 GDP & GDI were revised up to 2.0% & -1.8%, respectively, significantly above the prior releases of 1.3% & -2.3%, though still sending conflicting signals.

Equities

•   Bottom-up EPS estimates for the S&P 500 in 2023 fell from $220 to $219 in June, while top-down strategist estimates fell from $215 to $214.

•   All S&P 500 sectors had positive returns in June, the first such month since Nov 2022.

•   The S&P 500 forward 12m P/E surpassed its five-year average for the first time since April 2022.

•   Small-cap stocks outperformed large-caps for the first time since Feb 2023.

•   Falling as low as 12.91 on Jun 22, the VIX ended the month at 13.59, the lowest since Jan 2020.

Fixed Income

•   2Y & 10Y Treasury yields finished June at 4.90% & 3.84%, respectively, as market pricing shifted in response to Fed guidance & resilient econ data.

•   The 2Y10Y yield curve inversion deepened from -76bps to -106bps at the end of the month.

•   HY bonds outperformed Treasurys & IG bonds for the third month in a row, the longest such streak in over two years.

•   Implied Treasury volatility declined to its lowest level since Feb 2023.

Crypto

•   BlackRock and Fidelity Investments filed to launch spot Bitcoin ETFs, which if approved, would be the first spot crypto ETFs in the US.

Don’t Call It a Comeback

At different points this year, it looked like central banks were ready to ease up on their inflation fights. Canada had seemingly ended their hiking cycle in January, the UK & EU moderated their rate hike pace to 25bps in January & May, respectively, and Australia & the US chose to forgo hiking in April & June, respectively, in order to assess the cumulative impact of previous tightening.

One by one, however, central banks have dashed hopes for dovishness. Canada resumed hikes and the UK hiked by 50bps in June, the ECB indicated the tightening cycle would likely extend further into the year, Australia hiked in May & June, and despite pausing in June the Fed indicated that the median expectation was for two more hikes by year-end. Taken altogether, these hawkish messages pushed short-term government yields higher.

Naturally, expectations for where rates will end the year moved up in June as well. Market participants effectively expect one more 25bp hike in Canada & the EU, two more in the US & Australia, and three more in the UK. These moves point to the resilience of growth & inflation data in the face of the sharpest tightening cycle in decades.

Economic Weakening, but When?

For whatever reason, central banks have been unable to slow their economies down enough to be confident that inflation is on its way back to target. Take the Fed for example: despite hiking by 500bps and expecting a period of below-trend growth, they revised their 2023 Q4/Q4 GDP growth projection from +0.4% to +1.0% on Jun 14. Still below trend, but higher than their earlier projections.

Reasons may be mounting, however, that their revision may be overly pessimistic. When the Fed released their June projections, the latest Q1 GDP print was +1.3%, yet on Jun 29 it was revised up to +2.0%. Additionally, the Atlanta Fed’s GDPNow model showed Q2 GDP growth tracking at 2.2% as of Jun 30. If those estimates come to fruition, Q3 & Q4 GDP growth would both have to be 0% for the Fed’s year-end outlook to be correct.

The implications of this are significant. If their GDP projection is too pessimistic, it wouldn’t be surprising for that to trickle into their outlooks on unemployment & inflation. Assuming the Fed remains committed to battling inflation, revising their economic projections higher only raises the odds of them hiking further or waiting longer before cutting. And as many have been saying for the last 12-18 months, the more the Fed tightens, the greater the risk of something breaking. While March upheaval looks mostly behind us, that doesn’t mean something else isn’t ahead of us.

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