Nasdaq logs 7th consecutive week of gains, S&P500 fourth straight. Expectations of a Fed pause/skip & AI frenzy emboldens stock bulls

By Stuart Talman, XE currency strategist

In June 2022, the Fed actioned the first of its four 75bps hikes, lifting the policy rate to a 1.50%-1.75% range. Twelve months ago, if you had of been told that the Fed funds rate would be sitting above 5%, inflation remained persistently high, US regulators navigated a regional bank crisis and China’s re-opening was sputtering, you would be labelled crazy to forecast a bull market for US stocks.

Yet here we are.

A fourth week of gains for the S&P500 has lifted the index over 20% off its 13 October low, meeting the technical definition of a bull market.

Much has been reported regarding the contours of the 2023 equity market rally. The broader market climbing amidst historically narrow market breadth, propelled higher by a half dozen megacap tech stocks as AI frenzy generates frothy conditions.

If we were to strip out the gains from Apple, Microsoft, Nvidia, Alphabet, Amazon, Tesla and Meta, the S&P500 would be trading a year-to-date loss.

At Friday’s close, the S&P500’s 2023 gains were just shy of 12%.

Achieving a weekly gain of around a third-of-a-percent, the Nasdaq logged its seventh consecutive weekly gains, its longest winning streak since OCT/NOV 2019.

The Nasdaq has rocketed higher during 1H, logging a year-to-date gain of over 32%!

Will the rally continue, or, will a pivotal week ahead mark the end of the charge for the tech bulls and therefore the broader market?

We may receive the answer later in the week following the release of US CPI for May and the FOMC meeting.

The market expects Fed Chair Powell and his FOMC colleagues to keep the Fed funds target rate steady at 5.00%-5.25% on Thursday morning, assigning a less than 1-in-3 probability of an 11th consecutive hike.

Some analysts and former Fed officials believe is a much tighter call.

The CPI report is released 24 hours before the interest rate decision.

Should we receive an upside surprise (headline inflation expected at 4.1%, core at 5.2%), the Fed likely joins the RBA and Bank of Canada in delivering a non-consensus, late cycle hike, signalling that more work is required to rein in persistently high inflation.

Such an outcome would send shockwaves through the market, derailing the equity market rally, sending risk sensitive currencies, including the New Zealand and Australian dollars, sharply lower.

The alternative path emerges if US inflation surprises to the downside, locking in the Fed pause/skip. Risk assets likely rip higher on the view that the terminal rate is close, perhaps already in place.

Extinguishing the dollar’s five-week rally, the New Zealand dollar would make a beeline back to 63 US cents.

Closing last week near 0.6130, the Kiwi pierced through important technical resistance near 61 US cents, following a half-dozen failed attempts over the past three weeks. Climbing from the 0.6090’s as European trade commenced, NZDUSD was bid into the New York morning logging the week’s high a pip or so shy of 0.6040.

The Kiwi eased off its highs as US equity market were unable to maintain early session gains (S&P500 up ~0.75% at highs), settling into a dreary ~10 pip range through the second half of US trade.

Climbing over 1% for the week and a top three performer on the G10 leaderboard, the strong weekly close and clearance of important technical hurdles suggests further upside beckons for the Kiwi.

The 38.2% Fibonacci retracement of the May range is located at 0.6138, whilst the 200-day moving average sits a little higher, near 0.6150. Should price action extend through here to find a higher foothold, we’ll likely see a test of the 100-day moving average, currently located in the 0.6230’s.

Against the other majors, the Kiwi logged a weekly gain of around three-quarters-of-a-percent against the EUR and JPY, and a marginal gain versus the GBP.

The RBA’s surprise 25bps hike was the catalyst for the Kiwi shedding around 0.8% against the Aussie, NZDAUD plunging to a 4-month low on Wednesday a few pips below 0.9070 before paring losses to end the week near 0.9100.

The year-to-date low is currently located at 0.9022. Should risk sentiment lean positive for the week ahead, expect a fresh 2023 low.

It’s a mammoth week ahead.

The ECB and BoJ join the Fed with their monetary policy meetings, the former expected to raise the main policy rate by 25bps to 4.00% whilst the latter is expected to hold off on further changes to its yield curve control policy.

The calendar is busting with tier 1 macroeconomic data releases.

In chronological order, UK jobs data drops tomorrow evening, followed by US CPI in the early hours of Wednesday morning.

Super Thursday delivers the FOMC meeting, local GDP and across the Tasman, labour market numbers. Retail sales for China also drops on Thursday afternoon whilst the ECB’s decision is overnight.

Given last week’s reaction to the spike in jobless claims, the weekly claims data is given more weight as a volatility inducing event. US retail sales also released in Thursday’s US session.

Finally, it’s the BoJ on Friday……according to Bloomberg around a third of polled economists expect the BoJ to tweak policy at their July meeting.

It will likely prove a pivotal week that determines key directional moves as we head into the second half of 2023.

Stuart Talman is Director of Sales at XE. You can contact him here.