The Stock market is preparing to face a critical Season & the FED kept Meaningful Silence
• Next week is critical for the stock market as investors brace for CPI data and a Federal Reserve meeting.
• Fundstrat's Tom Lee said a low inflation reading could boost stocks as it would bolster a Fed pause in interest rate hikes.
• "Our view remains that inflation is tracking lower than consensus," Lee said.
Next week is one of the most important weeks for the stock market this year as investors ready for a FED interest rate decision that could bring a pause in rate hikes and new CPI inflation data.
Fundstrat's head of Research Tom Lee said that as stocks enters a new bull structure, the market could get jolted by volatility depending on how the new inflation data shakes out and how the Fed reacts to that data at its policy meeting on June 13-14.
With market consensus expecting the core month-over-month inflation gauge to be 0.4% for the month of May, investors would be amazed if inflation came in closer to 0.3%. That would be a positive surprise because it would help the Fed's potential decision to pause interest rate hikes this month and in July.
"If May Core CPI 0.4%, then we see these odds dropping to zero for each month," Lee said in a Friday note.
Lee is confident that inflation is indeed tracking lower than consensus based on real-time measures of CPI, and that inflation is actually nearing the Fed's long-term target of 2%.
"If this plays out, the Fed's pause will morph into a data dependent mode, where the bar is raised for further hikes," Lee said. "We expect investors to see this as a green light for risky assets, which means equity investors will not be fighting the Fed."
But if the Fed moves ahead with raising interest rates again, investors should be ready to buy a likely decline in stocks, according to Lee.
"Even if the Fed raises rates a few more times in 2023, to us, the key is whether this is in response to rising inflationary pressures. And our view is that these pressures are diminishing," Lee said.
Bolstering Lee's bullish case is the fact that market breadth is beginning to expand, which is a healthy sign for the sustainability of the current rally.
In other words, more and more stocks are beginning to take part in the upside, rather than the rally being drive by just a handful of mega-cap tech stocks.
"Market breadth is notably improving," Lee said, pointing to the outperformance of small-cap stocks this week. "Still want to buy dips as market breadth expanding."
Lee continues to recommend investors stay overweight to the industrials and regional bank sectors, and he reiterated his 2023 year-end S&P 500 price target of 4,750, representing potential upside of 10% from current levels.
Main Word : New inflation data and a key Fed meeting
The expected liquidity drain is underway and many analysts are predicting market turbulence. However, it's outcomes may not generate the impact that many believe. Many hidden forces have emerged, acting against a liquidity pressures.
The “Meaningful Silence” is here.
After an impulsive up movement in stock prices in the first half of 2023, investors are left wondering if will face to the opposite outcome.
A liquidity-fueled rally has driven the S&P500 up 12% so far this year. But now, the next great “liquidity drain” is about to begin. The latest debt limit scenario has resulted in a debt ceiling hold till the 2025, allowing monetary heads to fire up the printing press once again.
In the remaining period of the 2023, the U.S. Treasury will now issue around ~$1 trillion in t-bills — Treasuries with a one-year expiry or less — into the most systemically important market. If history repeats, officials will aim to fill the U.S. government’s bank account, the Treasury General Account (TGA) within the Fed's System, with around $600 billion by September , holding the master key to every commercial bank’s Fed account, the TGA will slowly collect reserves.
The consensus is concerned over two outcomes of the “TGA refill”: a large publication of government debt prompting market instability, and the further draining of bank deposits and reserves reducing liquidity.
The Result of both, however, aren’t as terrible as they become. First, it’s believed that issuing such a large quantity of t-bills in a short period of time will be difficult for markets to absorb, blowing out spreads and provoking depression , but as history shows, bond markets absorb huge issuances, even within a month, without much hassle.
As for demand, with yields offering the highest return in decades, plus the switch from an unsecured (LIBOR) to a secured (SOFR) monetary standard in full swing, the world is eager to chomp on America’s ever-increasing debt load.
Financial behemoths are hungrier than ever, we also know in advance that major market players are willing to consume a large batch of king debt by referring to the Fed’s latest survey of its “primary dealers”, specific entities the Fed mandates to make markets in Treasuries. Expectations are in line with demand.
Instead, it’s not whether market participants will be able to absorb trillions in new issuance but who buys the majority of Treasuries issued that will influence markets.
Instead, it’s not whether market participants will be able to absorb trillions in new issuance but who buys the majority of Treasuries issued that will influence markets.
The real concern is the subsequent liquidity drain from the banking system. Will this prompt another liquidity squeeze? It’s not as clear-cut...
• Next week is critical for the stock market as investors brace for CPI data and a Federal Reserve meeting.
• Fundstrat's Tom Lee said a low inflation reading could boost stocks as it would bolster a Fed pause in interest rate hikes.
• "Our view remains that inflation is tracking lower than consensus," Lee said.
Next week is one of the most important weeks for the stock market this year as investors ready for a FED interest rate decision that could bring a pause in rate hikes and new CPI inflation data.
Fundstrat's head of Research Tom Lee said that as stocks enters a new bull structure, the market could get jolted by volatility depending on how the new inflation data shakes out and how the Fed reacts to that data at its policy meeting on June 13-14.
With market consensus expecting the core month-over-month inflation gauge to be 0.4% for the month of May, investors would be amazed if inflation came in closer to 0.3%. That would be a positive surprise because it would help the Fed's potential decision to pause interest rate hikes this month and in July.
"If May Core CPI 0.4%, then we see these odds dropping to zero for each month," Lee said in a Friday note.
Lee is confident that inflation is indeed tracking lower than consensus based on real-time measures of CPI, and that inflation is actually nearing the Fed's long-term target of 2%.
"If this plays out, the Fed's pause will morph into a data dependent mode, where the bar is raised for further hikes," Lee said. "We expect investors to see this as a green light for risky assets, which means equity investors will not be fighting the Fed."
But if the Fed moves ahead with raising interest rates again, investors should be ready to buy a likely decline in stocks, according to Lee.
"Even if the Fed raises rates a few more times in 2023, to us, the key is whether this is in response to rising inflationary pressures. And our view is that these pressures are diminishing," Lee said.
Bolstering Lee's bullish case is the fact that market breadth is beginning to expand, which is a healthy sign for the sustainability of the current rally.
In other words, more and more stocks are beginning to take part in the upside, rather than the rally being drive by just a handful of mega-cap tech stocks.
"Market breadth is notably improving," Lee said, pointing to the outperformance of small-cap stocks this week. "Still want to buy dips as market breadth expanding."
Lee continues to recommend investors stay overweight to the industrials and regional bank sectors, and he reiterated his 2023 year-end S&P 500 price target of 4,750, representing potential upside of 10% from current levels.
Main Word : New inflation data and a key Fed meeting
The expected liquidity drain is underway and many analysts are predicting market turbulence. However, it's outcomes may not generate the impact that many believe. Many hidden forces have emerged, acting against a liquidity pressures.
The “Meaningful Silence” is here.
After an impulsive up movement in stock prices in the first half of 2023, investors are left wondering if will face to the opposite outcome.
A liquidity-fueled rally has driven the S&P500 up 12% so far this year. But now, the next great “liquidity drain” is about to begin. The latest debt limit scenario has resulted in a debt ceiling hold till the 2025, allowing monetary heads to fire up the printing press once again.
In the remaining period of the 2023, the U.S. Treasury will now issue around ~$1 trillion in t-bills — Treasuries with a one-year expiry or less — into the most systemically important market. If history repeats, officials will aim to fill the U.S. government’s bank account, the Treasury General Account (TGA) within the Fed's System, with around $600 billion by September , holding the master key to every commercial bank’s Fed account, the TGA will slowly collect reserves.
The consensus is concerned over two outcomes of the “TGA refill”: a large publication of government debt prompting market instability, and the further draining of bank deposits and reserves reducing liquidity.
The Result of both, however, aren’t as terrible as they become. First, it’s believed that issuing such a large quantity of t-bills in a short period of time will be difficult for markets to absorb, blowing out spreads and provoking depression , but as history shows, bond markets absorb huge issuances, even within a month, without much hassle.
As for demand, with yields offering the highest return in decades, plus the switch from an unsecured (LIBOR) to a secured (SOFR) monetary standard in full swing, the world is eager to chomp on America’s ever-increasing debt load.
Financial behemoths are hungrier than ever, we also know in advance that major market players are willing to consume a large batch of king debt by referring to the Fed’s latest survey of its “primary dealers”, specific entities the Fed mandates to make markets in Treasuries. Expectations are in line with demand.
Instead, it’s not whether market participants will be able to absorb trillions in new issuance but who buys the majority of Treasuries issued that will influence markets.
Instead, it’s not whether market participants will be able to absorb trillions in new issuance but who buys the majority of Treasuries issued that will influence markets.
The real concern is the subsequent liquidity drain from the banking system. Will this prompt another liquidity squeeze? It’s not as clear-cut...