The previous week brought with it a breeze of good macroeconomic news that gave the Federal Reserve (FED) degrees of freedom to face the second half of the year without any rush or external pressures to adopt new monetary measures.

At the same time, last Monday the giant Apple announced an agreement with OpenAI (Chatgpt) to incorporate artificial intelligence into its manufactured products (iPhone, iPad and Mac), allowing its share price to quickly reach its historical maximum, yielding +7.9% during the week. 

These two factors led the S&P 500 and Nasdaq US stock indexes to reach consecutive all-time highs for the week, returning +13.9% and +17.8% year-to-date, respectively. The Dow index continues to climb just +2.4% anchored by the healthcare sector which has moved horizontally so far this year. 

At the same time, we saw the 10-year sovereign rate quickly easing to 4.23% (-22 basis points) as headline inflation closed the previous month at 3.3% (from 3.4%) and core inflation, that which excludes food and energy prices, at 3.4% (from 3.6%), both showing the long-awaited move towards 2% expected by the FED. 

Meanwhile, on the business front, Tesla shareholders ratified the salary compensation of its CEO, Elon Musk, and opted to move the incorporation of the automaker from the state of Delaware to Texas, a fundamental change from the legal and judicial perspective, downplaying the importance of Delaware after the justice of that state wanted to appease Musk's US$55 billion compensation. 

Meanwhile, European markets gave way with the French market falling -6.2%, after its president Emmanuel Macron called for parliamentary elections the following June 30 and July 7, before the Olympics take place, where the extreme right, led by Marine Le Pen, could take control of the government, something not well seen by investors. 

Finally, the G7 leaders' meeting in Italy went unnoticed except for how confused President Biden was during some of the events.

This week, which will have a federal holiday on Wednesday (Juneteenth), will be accompanied by a series of speeches by Fed officials starting tomorrow, followed by production and retail sales data and ending the week with global ISM activity readings on Friday. For now, industrial production is estimated to have contracted -0.4% year-over-year while retail sales are expected to have expanded 3%. Expect the week to be more volatile as Friday June 21st is quadruple witching, a quarterly date when options and futures on stocks and indices of all kinds are closed in preparation for the close of the second quarter of the year.  

On the corporate front, Carmax, Factset, KB Homes and Kroger, among others, will be reporting their quarterly results, with Fedex and Nike expected next week, which will give us a glimpse of domestic and global demand in an environment where trade barriers are being lifted. Last week, for example, the Eurozone imposed a +38% tariff on electric vehicles from China, following in the footsteps of the United States. But none of this may be relevant as much of the world map will be focused on the regional Soccer Cups taking place in Germany and the United States.

After the FED kept the monetary instance rate at 5.5% the previous week, the question and answer session was held by its chairman, Jerome Powell, where the focus was on the upward correction of inflation made by the issuing institute in its projections for the end of the year, since a couple of hours earlier inflation for the month of May had fallen more than expected. In them, the FED projected general PCE inflation at 2.6% and core inflation at 2.8%, while the projection for the evolution of interest rates for the rest of the year was practically down 25 basis points after the presidential elections on November 5. This is because Powell, it would seem, does not want to be involved in accusations of political interference. It is in this environment that Powell noted: 

Yes. No, I mean, I think what we've said is that we don't think it's appropriate to cut rates and start easing policy until we have more confidence that inflation is getting back to 2 percent on a sustainable basis. And that's the test that we've applied. I don't know whether that includes it or excludes it. I mean, really, it's a forecast, a fairly conservative month-to-month forecast, that would lead to slightly higher, you know, 12-month rates by the end of the year. If we get, you know, better ratings than that, then you'll see them go down or stay the same. If you're at 2.6, 2.7, you know, that's a very good place to be.

Adding in relation to the change in inflation projections the following: 

Yes. What changed a lot was the inflation forecast. So, the core inflation forecast increased by several tenths by the end of the year. And as I mentioned before, in the, you know, what did we get out of this? We had really good inflation data in the second half of last year, then sort of a pause in progress in the first quarter. 

And what we got out of that was that it's probably going to take longer to get the confidence that we need to start easing policy. So, the idea is that the rate cuts that might have taken place this year will take place next year, you know? There are fewer rate cuts at the median this year, but there's one more next year. So, really, if you look at the end of 2025 and 2026, you're almost exactly exactly where you would have been, it's just moved later because of that progress. 

Now, you get different data today. So, we'll have to see which way the data illuminates, you know, where the economy has repeatedly surprised forecasters in both directions, and today was certainly a better inflation report than almost anybody expected. And we'll just have to see what the incoming data flow brings and how that affects the outlook on the balance of risks.

Thus allowing us to conclude that the FED is in no rush to cut interest rates going into the second half of the year unless there is a plunge in inflation. However, with oil prices hovering around US$78 a barrel and wage inflation above 4%, it is unlikely that the inflation scenario will change dramatically as the wealth effect from the equity rally continues to dampen domestic demand. 

Now you have more information about your investments. See you next week with more news.

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