The FCMS Investment Committee is pleased to share the latest insights on the current financial market and economic developments.

Market Perspectives

Here are the top 3 things from our FCMS Investment Committee on current financial markets and economic developments:

1. 1. Tech Cools, Yields Rise Ahead of Fed Meeting

      Last week was relatively unremarkable. The rally in domestic mega-cap tech stocks cooled as year-to-date underperformers, such as domestic small-caps and Chinese stocks, outperformed. We believe that this equity rotation was more a result of technical factors than the start of a new trend. The AI theme had become extremely overbought heading into last week. In the fixed-income market, yields at the short end of the Treasury curve rose ahead of this week’s Federal Reserve meeting as investors continued to chip away at prospects of rate cuts in 2023.

   2. CPI Release and FOMC Decision: A Week Full of Financial Catalysts

      This is a week laden with catalysts for financial markets, with the release of monthly CPI on Tuesday and the Federal Open Market Committee (FOMC) decision on interest rates yesterday.

   3. Inflation Remains Tame, But Fed Keeps Its Options Open

      Investors reacted positively to the CPI report, which showed that inflation increased by only 0.1% during May and by 4.0% from the year-ago period. This was the lowest annual increase since March 2021. The Federal Reserve also decided to maintain the Fed Funds rate in a target range of 5.0%-5.25%. This is a departure from the previous 10 meetings where the Fed had raised interest rates.

      It appears that the Fed may be pausing its interest rate hiking campaign for now, but this decision does not signal an end to the cycle. FOMC members are projecting the potential for two additional interest rate increases by the end of 2023 in an effort to combat inflation.

      Given that the ultimate path of interest rates is still uncertain, we expect financial markets to continue to be sensitive to future inflation data points.

What Happened Last Week?

Here is a recap of the top 3 things that happened last week:

• The week was uneventful, as small-cap stocks and Chinese equities, which had underperformed year-to-date, rebounded.

• Price action last week was primarily driven by technical factors, as macro and fundamental drivers were not as significant.

• As the probability of rate cuts in 2023 decreased, yields on the front end of the Treasury bond curve rose.

What We’re Watching This Week

• Huge market catalysts this week include a Fed meeting and Consumer Price Index (CPI) report for May.

• Expect a “pause”, not “end”, to Fed’s tightening cycle on Wednesday; outside chance of a hike if CPI comes in hot.

• Watching for Foreign Exchange read-throughs from policy decisions and messaging out of the European Central Bank and Bank of Japan.

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