Equities finished the holiday-shortened week with a more complicated message than the headline indexes suggested.
The Dow Jones Industrial Average pushed to new records this week, helped by industrials and financials, while the broader market wrestled with a hawkish Federal Reserve, rising 2-year yields, and an increasingly narrow technology trade. The week’s major geopolitical headline was the U.S.-Iran interim agreement, which extended the ceasefire and laid out a path to restore traffic through the Strait of Hormuz, sending oil prices lower and easing some of the energy-inflation pressure that had dominated recent trading.
But the Federal Reserve was the main event. Fed guidance this week was clear: inflation is still a problem, and half of the FOMC members are penciling in the possibility that rates could move higher this year. (More below). The interest rate decision and subsequent press conference sent the CBOE VIX higher but an agreement reached between the U.S. and Iran helped calm the markets.
For the week, the Dow gained +0.7% to 51,565, the S&P 500 added +0.9% to 7,501, the Nasdaq rallied by +2.4% to 26,518 and the Russell 2000 moved higher by +1.2% to 2,980. The CBOE Volatility Index dropped by -5.1% to 16.78.
The Marked “Warshed Out”
The Federal Reserve held interest rates steady Wednesday, but the first meeting under new Chair Kevin Warsh signaled a meaningful shift in both policy tone and communication strategy that could shape markets in the near-term. The Fed said economic activity was expanding at a solid clip, job gains had kept pace with the workforce, and inflation remained elevated, partly due to energy-related supply shocks.
The key line was blunt: the Committee “will deliver price stability.”
It was investors’ first look at regime change for the Fed, and the initial market reaction was to the downside for stocks. The June meeting was a pivot from recent offerings from the Fed, but this may be warranted as inflation has been above its 2% mandate for the last five years. As Warsh moves away from the status quo, investors will be along for the ride, and markets may be in for some added uncertainty at least in the near-term.
The selloff in stocks on Wednesday afternoon reflected a hawkish tilt that signaled the central bank’s ongoing struggle with inflation, which remains well above the Fed’s long-standing 2% target. In addition, the regime change clearly will bring communication shifts with it.
Breaking from recent years, the central bank released a significantly shorter and more stripped-down policy statement. Warsh described the change as intentional, saying the statement is “a bit shorter, a bit simpler” and designed to provide facts rather than steer market expectations. The revised statement also dropped language that had previously suggested a bias toward rate cuts, reinforcing the idea that easing is no longer the baseline scenario.
Rate Reaction
After Warsh’s hawkish tone hit the market, short-term rates bore the brunt of the market reaction. On Tuesday, Fed Funds futures were pricing in a 50% chance for a hike by October, with the first hike fully priced in for March. By Thursday afternoon, an October hike was fully priced in.
That change in expectations was reflected in 2-year yields, which rose by 13 basis points. Yet 10-year yields only rose by 5 basis points, implying that traders were taking the new Chair at his word that quelling longer-term inflation was a serious concern. That led to the flattest yield curve in over a year.
On my Market Minds podcast on Thursday, I discussed the market response to the Fed decision and took a deep dive into interest rate curves, short and long term yields, and much more. Click the button below to watch:
Investors are seeking signs that the U.S. stock market rally fueled by artificial intelligence has more life left in it, and the upcoming Micron Technology earnings will check the pulse of chip demand to see if it is still accelerating. Despite a sharp mid-week selloff, major U.S. stock indexes are hovering near all-time highs, supported by robust corporate earnings driven by an AI investment boom and relief from the Iran war.
Micron’s shares are up 298% this year, and the memory chip maker’s quarterly report on Wednesday will help investors gauge whether the surge in spending on data centers and the resulting profits generated across the semiconductor sector can continue to surprise to the upside.
The stakes are high. Micron’s earnings come at a time when valuations are elevated and investors are questioning whether the rally is overextended. Any indication of underlying demand and continued AI-related spending strength could give investors confidence to keep stoking the rally.
Although the AI narrative has dominated markets, underlying macroeconomic concerns remain. The Federal Reserve’s preferred inflation measure (PCE) is due this week as well as a final reading on first-quarter GDP. Both reports will provide checks on the health of the U.S. consumer and economic growth.
Economic Reports of Note (All Times EST):
Monday
8:30 am – CAN: CPI
9:00 am – US: Fed Member Waller Speaks
11:30 am – US: 3 & 6-month Bill Auctions
Tuesday
8:15 am – US: ADP Employment Change Weekly
8:55 am – US: Redbook
9:45 am – US: S&P Global Composite & Manufacturing PMI
10:00 am – US: Richmond Manufacturing & Services Index
1:00 pm – US: 2-year Note Auction
Wednesday
7:00 am – US: Mortgage Data
8:30 am – US: Building Permits10:00 am – US: New Home Sales
10:30 am – US: Crude Oil Inventories
1:00 pm – US: 5-year Note Auction
4:00 pm – US: Fed Bank Stress Test Results
Thursday
8:30 am – US: PCE
8:30 am – US: GDP
8:30 am – US: Durable Goods
8:30 am – US: Personal Spending & Income
8:30 am – US: Weekly Jobless Claims
10:00 am – US: Atlanta Fed GDPNow
10:00 am – US: Dallas Fed PCE
11:00 am – US: KC Fed Composite & Manufacturing Index
11:30 am – US: 4 & 8-week Bill Auctions
1:00 pm – US: 7-year Note Auction
3:40 pm – US: FOMC Member Williams Speaks
6:30 pm – US: Fed Member Goolsbee Speaks
Friday
8:30 am – US: Retail & Wholesale Inventories
8:30 am – US: Goods Trade Balance
10:00 am – US: Michigan Consumer Sentiment and Inflation Expectations
10:30 am – US: FOMC Member Williams Speaks
11:30 am – US: FOMC Member Kashkari Speaks
