Rate cut expectations slid and markets took a rally break last week.
Markets broke a 4-week win streak as rate cuts for September by the Fed took a hit. The latest Fed Futures show close to an even split between a 25 basis point cut to no rate change. November and December still show a high probability of a rate cut, but markets has largely built in September as the rate cut launch point. The Fed’s own NowCast model for CPI shows only a slight increase (+0.1%) projected for May, meaning the year-over-year inflation metric could be lower at the end of the month. This week’s PCE Price Index is also projected to have changed little, month-over-month. We enter the blackout period for Fed speakers, so there won’t be anything for the Fed to clarify once the PCE numbers are released.
Some market pundits continue to suggest the market is over-valued, which “bubble” metrics show is not the case.
Historically, when equity markets have been this strong for the first 100 days of the year, the probability is that the remainder of the year will be positive. In fact, when the S&P 500 Index is up by more than 10% by the 100th day of the year, the average return the remainder of the year is 8.8%. Don't be surprised if we see some muted returns this week and next week. With the shorter week due to the Memorial Day holiday, and the beginning of Summer, it’s likely that trading volumes will be lighter in the short-term.
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