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Inside Markets — Surprise Hikes

Surprise Hikes

June 7, 2023

The probability of a June Fed rate hike increases to 40% after surprise hikes from RBA and BOC. A hotter-than-expected May CPI print could push the Fed to hike in June, but mixed signals in the May Jobs Report will likely keep the Fed on hold. May non-farm payrolls were strong, but a shorter workweek and a rare 30bp increase in the Unemployment Rate signal reduced demand for labor.

The S&P 500 managed to push above significant technical resistance at ~4200 last week with cyclical and small cap stock leadership. Until last week, our primary concern with the rally was its thin leadership and narrow breadth.  In our opinion, obtaining broad sector participation and cyclical leadership was unlikely given that policy rates are 2x neutral and money supply is in outright contraction. However unlikely, it is important to acknowledge that the cyclically led break above 4200 followed sharp improvement in the US Economic Surprise Index (ESI) after declining for two straight months.  We think the key test for this rally happens when cyclical indices and sectors approach the upper end of their March-through-May ranges. If US equities are going to move higher from here, we think it needs to be led by cyclical groups. The S&P 600 small cap index (SML) is a broad cyclical benchmark that’s approaching the upper end of range resistance today.  A close above 1190 would signal further strength and continued rotation into cyclical groups. It is important to recognize that cyclical sectors are lifting from the lower-end of multi-quarter trading ranges. Failure to close above 1190 could indicate this move is nothing more than a temporary position squeeze.

Tomorrow brings US weekly jobless claims, which will be watched closely following mixed signals from May Jobs Report (mentioned above).

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