Macrosynthesis

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Last Week's Recap

All eyes were on Consumer Price Index (CPI) numbers and the U.S. Federal Reserve last week, both of which came in as expected with the Fed holding off on increasing interest rates above the current rate of 5 percent. Fed Chairman Powell noted more rate hikes were possible, however.

Excluding food and energy, core CPI is up 5.3% year over year, indicating that prices are still well above the annual inflation rate target of two percent.

The Dow closed down over 100 points on Friday, with the S&P 500 and the Nasdaq declining nearly 0.4% and 0.7%, respectively, amid investors' ongoing assessment of the  Tech stocks such as Microsoft and Micron Technology fell by 1.7%, while Virgin Galactic soared 16.3% due to the launch of its launches for commercial space tourism. Tesla increased by 1.8% after reaching a 37-week high during the session, and Adobe rose by 0.8% due to positive earnings and enthusiasm for AI additions.

The Dow Jones added 0.9% for the week, marking a three-week winning streak despite Fed warnings of future rate hikes. The S&P 500, up 2.2%, achieved its fifth consecutive weekly gain, its longest streak since November 2021. The Nasdaq gained 2.7%, marking its eighth consecutive positive week. Markets will remain closed on Monday in observance of the Juneteenth holiday.

Interest Rates Paused... For Now?

Despite the U.S. central bank maintaining the policy interest rate, officials suggested rate hikes are likely to resume. Fed Governor Christopher Waller expressed concerns over the inflation rate, which he said is not decreasing as expected, and suggested further tightening might be necessary. Waller downplayed the idea that further Fed rate increases might be unnecessary due to worse-than-expected credit contraction. He noted that changes in U.S. credit conditions were consistent with the financial tightening underway due to Fed interest rate increases. Meanwhile, Richmond Federal Reserve President Thomas Barkin indicated further rate increases were needed due to the current inflation trends.

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According to a survey by the University of Michigan, U.S. consumers' short-term inflation expectations fell to a more than two-year low in June, and the five-year outlook also improved slightly. This follows data that showed significant declines in annual consumer and producer prices in May, mostly due to falling energy costs.

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Despite the Federal Reserve maintaining its policy rate unchanged this week, it signaled that borrowing costs might need to increase by up to half a percentage point by the end of the year.

The Bank of China Continues to Expand

The Bank of China is set to open its first branch in Riyadh, Saudi Arabia, in late 2023. This move represents growing cooperation between China, the world's second-largest economy, and the Arab world.

Jun Tian, the team leader for the branch's launch, stated that the bank aims to introduce Chinese currency (the yuan) to international markets, with hopes that it would be used in financial transactions between China, Saudi Arabia, and the Arab region as a whole.

This development follows the 10th Arab-China Business Conference in Riyadh, which aimed at boosting economic cooperation between the Arab world and China. The increased use of the yuan in the region is expected to encourage further investment from Chinese companies.

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• iShares FTSE China Large-Cap ETF: +4.10% (1-Week)
• Alibaba: +6.95% (1-Week)

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Last Week's Top Events

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Noteworthy Events  

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Losing Virgin Status

Virgin Galactic announced plans to launch its commercial space tourism service later this month. The virgin launch, named Galactic 01, is scheduled between June 27 and 30, and it will carry three members of the Italian Air Force for microgravity research.

The company plans to follow up with its second commercial flight in early August, intending to conduct monthly commercial flights thereafter. This move, a long-awaited milestone, will enable Virgin Galactic to start servicing its backlog of approximately 800 passengers and validate its capacity for regular flights. Virgin Galactic, founded by Richard Branson in 2004, saw its shares spike by over 40% after this announcement.

Eyeing the AI Frenzy

The group of seven tech stocks referred to as the S&P 7, which includes Nvidia, Apple, Tesla, Microsoft, Google, Meta, and Amazon, has seen a year-to-date increase of approximately 60%. On the other hand, the remaining 493 companies in the S&P 500 index have collectively seen a YTD rise of just 3%.

The S&P 500 index overall has risen 15% YTD. These seven tech stocks currently represent about 30% of the entire S&P 500 index, indicating that the entire market is significantly influenced by the trend in AI. It also indicates the bull run could quickly reverse if sentiment shifts to a belief that the rally in these stocks is overdone.

Robots That Suck

Amazon's proposed $1.7 billion acquisition of iRobot, the manufacturer of Roomba vacuums, has been approved by the UK's Competition and Markets Authority (CMA). The CMA found that the acquisition would not substantially lessen competition in the UK. Following the approval announcement, iRobot's stock increased by 21%. However, Amazon's shares closed down by 1%.

The deal, which aims to strengthen Amazon's position in the smart home market, is still under review by the U.S. Federal Trade Commission and European Union antitrust regulators.

Amazon offered to buy shares at $61/share. Shares are trading at $51/share, representing a nice opportunity to make 20% should the deal go through. The U.S. FTC has yet to make a case against the deal but is getting some pressure from members of Congress.

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CASE STUDY: Seagate Technologies

Seagate Technology Holdings, a prominent data-storage technology company, announced on March 29th its plan to cut an additional 480 jobs. This move extended the company's earlier decision to eliminate around 3,000 positions, constituting 8% of its workforce.

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The newly announced job cuts, affecting about 1% of the company's workforce, will impact various functions.

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This announcement of significant layoffs led to a +5.56% increase in Seagate's stock in one day. Over the next several days, the stock continued to rise to reach +11% since the event.

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Although an average move for the Mass Layoff scenario indicated a downward movement in stock price, using LevelFields filters for large-cap technology companies, the proceeding movement is positive. ‍

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Filtering down further, large-cap technology companies with a low P/E ratio have an average 1-day impact of +3.4%.

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Upcoming Catalysts:

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Notable Earnings

Tuesday

• FedEx

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Thursday

• Darden Restaurants
• Accenture (ACN)
• GMS (GMS)
• Smith & Wesson Brands (SWBI)

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Friday

• CarMax (KMX)

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Economic Reports

Next week, investors will keenly observe speeches by various Federal Reserve policymakers, as well as testimonies by Federal Reserve Chair Jerome Powell and his colleagues Lisa Cook and Philip N. Jefferson before Congress, to understand the possible course of US monetary policy in upcoming months.

Meanwhile, US markets will close on June 19 for the Juneteenth holiday.

This is not financial advice. All information represent opinions only for informational purposes.

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The LevelFields Team