June in summary

June was the month when attention was turning back to interest rates after all drama with bank failures and bank system stabilization. Inflation has proved unexpectedly stubborn. Although recession has been avoided or delayed, few are predicting stellar growth.

In these circumstances, rising rates are bad for stocks and bonds. They hurt share prices by raising firms’ borrowing costs and marking down the present value of future earnings. Meanwhile, bond prices are forced down to align their yields with those prevailing in the market.

Digging deeper into the key factors behind markets movement in this month reveals the following:

On January 19, 2023, the United States hit its debt ceiling of $31.4 trillion. The last time the debt ceiling was raised to 31.4 trillion U.S. dollars was in December, 2021. The situation was not outstanding, because Congress generally approves a new limit increase. But this time House Republicans refused to raise the legal limit unless Biden and the Democrats impose federal spending cuts and restrictions on future spending. Ultimately, the U.S. Senate passed the new debt ceiling package with some conditions to avert a first-ever default by the U.S.by June 5:

• The legislation temporarily removes the federal government's borrowing limit through Jan. 1, 2025.
• Some measures were approved to reduce non-defense discretionary spending, stiffen work requirements for some recipients of food assistance, and allow the Mountain Valley natural gas pipeline.

But there may be negative consequences:

• Refilling the Treasury General Account will lead to a "potent liquidity squeeze". At the same time, spending is limited.
• Due to current high interest rates, the placement of treasuries will be expensive for the government.

However, some companies benefit from these circumstances. For example, Equitrans Midstream (ETRN) - a lead developer of the Mountain Valley pipeline. The proposed debt-ceiling legislation also ensures that student loan repayments will start up again in the fall. That augurs well for SoFi (SOFI) as it could lead to increased demand for student loan refinancing.

In June, we saw a tightening of the Fed's rhetoric, foreshadowing further rate hikes and maintaining rates at the peak level for a longer time. On the other hand, the main macroeconomic data published in June were largely positive, which speaks in favor of the Fed's opinion on the stability of the American economy and reduces the likelihood of a recession in the United States.

Let's take a closer look at the main US macroeconomic events of the past month:

The Fed

At the FOMC Meeting in June, the regulator took a pause in rising rates for the first time since March last year and left it unchanged at 5.00–5.25%. The decline in the growth rate of consumer inflation in March according to the consumer price index (CPI), the update of which was released the day before the meeting, gave the regulator the opportunity to take a break and look around to assess how the tightening of financial conditions affects the American economy. Nevertheless, at the end of May, we once again saw the stability of the growth rate of the core consumer inflation index (Core CPI) MoM, which encouraged the Fed to give a hawkish comment on its further policy development. At the meeting the regulator raised the median forecast for the rate for 2023 from 5.1% to 5.6%. Now the Fed expects two more increases of 25 bps before the end of the year. According to the results of 2023, the Fed expects inflation at the level of 3.2% (the March forecast is 3.3%), and core inflation at the level of 3.9% (the December forecast is 3.6%). In addition, during speeches in the following weeks, Fed Chairman Jerome Powell shared his expectations that he does not expect inflation to return to the target level of 2% before 2025.

At the same time, the regulator sees evidence of the stability of the American economy, which led to a revision of expectations for GDP growth and unemployment in 2023 at the last meeting. The GDP forecast for the current year was raised from 0.4% to 1.0%, and expectations for the unemployment rate were lowered from 4.5% to 4.1%.


PCE Inflation

New data on the personal consumption expenditures (PCE) released at the end of the month brought some additional positive sentiment to the market. In May, the growth of the PCE index slowed significantly and amounted to 0.1% MoM and 3.8% YoY (in April, the growth was 0.4% MoM and 4.3% YoY). In addition, a decrease in growth rates was also demonstrated by the Core PCE index, which grew by 0.3% MoM (in April, the growth was 0.4% MoM). Recall that the dynamics of PCE remains the main indicator on which the Fed relies when making decisions on the further movement of the rates.

GDP

The final estimate of GDP for the first quarter was significantly stronger than expected. According to the new data the American economy grew by 2% YoY (previous estimate: +1.3% YoY). For comparison, in the fourth quarter of 2022, GDP grew by 2.6% YoY. The higher GDP growth after recalculation is primarily due to the revaluation of such components as consumer spending and exports. Thus, the current slowdown in US GDP growth no longer looks so significant, which further pushes back the risks of a recession.


PMI

Business activity in June, according to preliminary estimates, continued to grow, but the growth rate slowed compared to May. So, the Composite PMI came out at 53.0 against 54.3 in May. Such growth was provided due to strong dynamics in the services sector (Services PMI in June – 54.1; in May – 54.9). But the manufacturing index showed a reduction in business activity in the manufacturing sector of the economy for two months straight (Manufacturing PMI for June – 46.3; for May – 48.4).


Target rate expectations

At the moment, the market is waiting for one rate hike at the meeting in July, to the level of 525-550 bps (+25 bps). Expectations for the first rate cut have moved further into 2024 — to May.

While the overall news on global inflation showed slowing across the globe, the absolute level remained stubbornly high, despite lower energy prices and slowing economic growth. Labor markets, notably in Europe and the United States, were resilient, with significant job vacancies and low unemployment. US corporate earnings declined for a second straight quarter but much less than initially feared. This led the US markets to a gain of 6.6% for the month, the best of the major markets.

Several events stood out during June

Wall Street has been in a rally mode this year, despite the Fed hiking rates and signaling that more hikes are looming before the end of this tightening crusade. Tech index NASDAQ 100 has risen at almost 40% since the beginning of the year, while broad market index S&P 500 demonstrated 16% growth. It seems that the biggest driver behind the gains is the enthusiasm about artificial intelligence (AI). Tech firms tied to the AI ​​craze saw their stock prices soar, especially Microsoft, Nvidia, Apple, Alphabet, Meta, Amazon and Tesla — up more than 60% since the start of the year.

What may have prompted many participants to jump into the AI stocks may have been the release of ChatGPT 3.0 in 2022, which opened the possibilities of generative AI. Chipmakers took a large part of this hype as AI requires powerful microchips. Nvidia’s stock has surged more than 300% since its October lows as the firm holds around 95% of the market share of machine learning chips. Other chipmakers, like AMD and Intel, also enjoyed massive gains, with the former surging by more than 100% since October and the latter around 50%.

Nvidia is trading around 45 times the estimated earnings for next year (just a few weeks ago the forward PE ratio was almost 60x). That’s still above around 19x forward PE ratio of the S&P 500. So, the AI market can be considered overvalued and new investors may avoid joining the action. Maybe that’s why there was a pullback in the stock market recently. One other risk to the AI euphoria is geopolitics. For the construction of their chips, most chipmakers are reliant on Taiwan company TSMC. Thus any tensions between China and Taiwan could affect the semiconductor market and AI market respectively.


Even if there is a further pullback in the stock market, it can be considered as a corrective phase rather than the beginning of a bear market. Most high-growth tech firms are valued by discounting expected cash flows for the quarters and years ahead. So, with Nvidia’s and other chipmakers’ cash-flow-per-share expected to continue accelerating in the foreseeable future, and also bearing in mind market expectations of several rate cuts by the Fed next year, present values have the potential to continue rising.

Even if geopolitical tensions rise and leave their mark, a potential episode of market risk-aversion could prompt AI investors to increase their exposure to mega-cap, more established, tech stocks, like Alphabet, Amazon, Apple, Meta и Microsoft which are also expanding their business in the AI field. Along with Nvidia, these giants are responsible for most of the gains in the S&P 500 since October.

For investors to start fleeing out of the stock market, not only does the Fed have to convince them that there are no rate cuts on the table for next year, but growth estimates for big tech firms in the upcoming earnings seasons may need to start disappointing. So, investors may see the current retreat, or any near-term extensions of it, as an opportunity to buy at more attractive levels.

The biggest beneficiary of the AI craze on Wall Street was Nvidia, which has seen its shares rally nearly 200% year-to-date. Nvidia has benefited from the continued adoption of its accelerator GPUs for use in large language model training.

In June Nvidia’s stock reached a market cap of over $1T and in the process became the seventh U.S. company in history to do so. Previously, Apple, Microsoft, Amazon.com, Google parent Alphabet, Tesla, Meta Platforms had breached the $1T mark. However, Facebook parent Meta, and Tesla are no longer part of this club.
The chipmaker had gained ~25% after its Q1 results and guidance that shocked Wall Street. For the period ending April 30, Nvidia earned $1.09 per share (vs. consensus estimate of $0,92), excluding one-time items, as revenue came in at $7.19bn (vs. consensus estimate of $6,52 bn). $4.28B revenue came from the data center segment and $2.24B from gaming.

For its second-quarter results NVIDIA expects revenue to be $11 bn, plus or minus 2%, well above the $7.18B analysts were expecting. The company added it is "significantly" increasing its supply for products related to its data center business amid the surge in interest surrounding artificial intelligence.

The company also made a flurry of announcements at the end of May related to a several products and services tied to AI, like an AI supercomputer platform called DGX GH200, developing a hyperscale generative AI supercomputer called Israel-1 in Israel, collaborating with SoftBank on a platform for generative AI and 5G/6G applications, among other things.

These new restrictions will be part of the final rules codifying the export control measures announced in October last year. They could be implemented already in current July. Leasing of cloud services to Chinese AI companies may also be restricted.

Last year's measures prohibited U.S. firms from working with Chinese chipmakers and allowed for certain chips to only be sold to China-based companies with an export license, on account of national security fears. Prior to that, the U.S. government curbed the sale of certain AI chips of Nvidia and Advanced Micro Devices to China and Russia. Nvidia's A100 chip and other microprocessors were among those restricted. The latest curbs could potentially ban the sale of A800 chips without a license. The A800 chip was launched in response to last year's export rules.

According to Wall Street analysts, Nvidia could see as much as a 7% impact to revenue. Bank of America noted that 7% of the company's total revenue and 10% of data center sales could be impacted if additional licensing requirements were needed for A800 and H800 data center chips. According to recent filings, Nvidia generated $1.59B in revenue from China, including Hong Kong, in its fiscal first-quarter and $5.79B in fiscal 2023.

China AI demand has likely increased this year, due to generative AI adoption, from last year, when Nvidia quantified the chip export control as a $400M impact.

Nvidia CFO said she did not expect a material change to the company's earnings as a result of the potential curb, though China accounts for between 20% and 25% of data center sales.

Apple unveiled its mixed-reality headset at its annual Worldwide Developers Conference. The Apple Vision Pro is the most significant new product line for Apple since the Apple Watch first emerged in 2014. The Apple headset aims for the super-premium end of the burgeoning market and is expected to be priced at $3,500. As for its heavy power needs, the company says the device gets two hours of use with an externally connected battery (so that the battery weight isn't on the user's head).

Initially Apple stock fell in the days after the product launch as investors and analysts expressed disappointment over the Vision Pro's expensive price tag and raised questions about the revenue possibilities of the headset. But shares have since resumed their climb amid a broader rally in technology stocks. The company has already rolled out developer tools and new software to create apps for its mixed-reality headset Vision Pro.

Despite the difficulties, as with any new product launch, Apple has entered a new market. According to analysts’ estimates, the number of users of AR and VR gadgets will increase by an average of 24% by 2027 relative to the level of 2022.

Overall in June, the US market persistently recovered from the traditional “sell in May and go away”.

• Among the leaders we have cyclical stocks, they appreciated after the harsh May: Industrial and Materials indices printed double digit monthly growth, Financial and Energy - high single digit
• The June leader Consumer Discretionary sector is also the TOP-3 YTD performer in the US market - this is mostly due to low 2022 base and high concentration of growth stocks.
• The growth stocks are generally concentrated in the Technology and Communication sectors. After a strong May they printed decent mid single digit growth in June. Even though the soon monetary easing prospects are fading away, the markets are excited about the AI/VR and the money inflows are somehow leaking to the other growth stocks. After tough 2022 these sectors showed an impressive 1H23.
• Utilities are lagging behind all the other sectors this year due to both slower economic growth and slower inflation. The Energy sector suffers lower hydrocarbons prices and the oil and gas companies' financials tackle a high 2022 base effect. The Financial sector is very cyclical and right now it stands the low cycle as the rates are high and the capital market activity is humble.

US Dollar Bonds

US Treasury yields dynamics in June

In June, for the most part, there was an increase in yields in dollar bonds. The noticeable increase in yields occurred among bonds with a maturity ranging from 1 to 20 years. US treasuries yields, which are always taken as a benchmark, increased by 8-50 bps in this period over the last month. The largest increase in yields was demonstrated by treasuries with maturity dates from 2 to 5 years (by 43-54 bps). There was no clear dynamics in shorter bonds. Such dynamics of yields is caused by a shift in expectations regarding the timing of the end of the Fed's restraining policy. Back in early June, the market consensus assumed that the first rate cut would occur in September-November of this year, while now it is assumed that this will happen only in May 2024. At the same time, expectations for the maximum rate level were not adjusted much, so there was no revaluation of bond yields shorter than 1 year. The yield spread between 10-year and 1-year Treasury bonds continued to expand, deepening into the negative zone, and reached the level of -1.59%

In June, high-yield US corporate dollar bonds continued to show better dynamics than investment-grade US corporate bonds, which is explained by the restoration of risk tolerance among investors.

EUR Bonds

Euro area yield curve change in June

Euro-denominated bond yield also rose significantly in June. Growth in yields by 13-48 bps was observed along the 1Y-10Y curve segment of the euro area highest quality government bond yield curve. At the same time, bonds with a maturity ranging from 3 months to 5 years showed the largest increase in yields by 29-48 bps. This is the result of the market's evaluation of the risks of a higher maximum rate and a longer time to maintain it at the peak level. The market began pricing such risks against the background of multiple hawkish signals from the ECB and mixed preliminary data on consumer inflation in June, according to which the core consumer price index increased by 0.1% on a monthly basis. The spread between 10-year and 1-year highest quality government bonds of the euro area widened significantly, reaching the -0.94% level by the end of June against -0.63% by the end of May.

Euro-denominated high-yield corporate bonds were also performing better in June compared to euro-denominated investment-grade corporate bonds. The reason is still the same – the growing risk tolerance among investors.

Gold

In June, the price of gold on global markets fell by about 1.7% and by the end of the month was about $1,929. The fall in gold prices from the highs of early May reached 8% as of the end of June. The correction that continued last month is also based on a change in expectations on the timing of the Fed's restraining policy end. As noted earlier, expectations on the first rate cut date have now moved forward by 6-8 months compared to what the market estimated at the beginning of June. This led to a noticeable increase in the yield of dollar-denominated debt instruments last month and reduced the current attractiveness of gold for investors. In addition, maintaining high rates for a longer period of time also pushes back the prospects for accelerated economic growth in the recovery phase. This is important for investors in terms of demand for metal from manufacturers. Despite all this, gold remains a promising asset on a longer horizon, as the peak of the monetary policy tightening cycle in the US is likely to be reached in the near future.


Noticeable Commodities moves (Energy+metals+others)

The commodity markets are pretty volatile this year and especially during the last few months. There are two factors which put pressure on commodity prices and on the other hand support them.

Concerning the oil prices, the beginning of June was pretty strong thanks to the OPEC+ meeting. The participating countries agreed to decrease oil production by 1.4 mn b/day in 2024 and in addition Saudi Arabia announced an additional 1.0 mn b/day cut for July 2023, later in July they prolonged this decision for August 2023. Russia also prolonged the additional 0.5 mn b/day cut for 2024, previously they had given an obligation to do that till the end of 2023. After the OPEC+ meeting Brent price hit $78/b (+7.8% MTD) however the global recession risk curbed the oil markets and later in June Brent tested $71 mark. It didn’t go lower as the US strategic oil reserve is at 40 years low levels and the US government announced step by step purchases, the WTI price lower $70 supported this strategy. As a result, during June Brent has appreciated by 3% closer to $75/bbl, WTI - by 4% to $70.4/bbl. The first half of the year was weak for the oil prices: Brent -11.6%, WTI -12.5%.


The pricing for natural gas works in a different way. Global warming leads to the hottest weather in the world since the start of modern observations. Natural gas is the main fuel for electricity, so demand for them is higher now and Gas prices recover from the weak beginning of the year: US Gas price on Henry Hub gained 23% in June (to $2.77/mmbtu), in Europe on TTF hub the rice was extremely volatile but generally prices stabilized next to $423 per 1000 cubic meters (+51%). However the prices are still much lower compared to the beginning of the year as the winter was also warmer and the households and enterprises didn't need to heat their houses and sites: YTD Henry Hub -37.5%, TTF -47%.


Industrial metals

In June, there wasn’t much optimism on the market of industrial metals. Nickel prices decreased by 0.4% at the end of the month and aluminium price tumbled by 4%. Market participants are still afraid of a recession in the US and Eurozone economies, which can potentially lead to a global recession. Additionally, the weak recovery of the Chinese economy after removing COVID restrictions can put pressure on prices of industrial metals.


At the same time, copper prices rose by 3% in June following the increase in the Fed's forecast for US GDP growth for 2023 and the positive revision of US GDP estimate for the first quarter of this year. Moreover, data from Chile provided support for copper prices. Chile is the largest copper producer in the world and in May (data were published in June) output in the country decreased by 14% yoy. For the first 5 months of this year copper output in Chile decreased by 5% yoy.


Precious metals

Palladium and platinum prices fell by 10% and 9% respectively in June. Both metals are actively used in the automotive industry in the production of catalysts in cars with gasoline engines. However, prices have been declining for two months in a row, despite the growth in global light vehicle sales. Market participants fear a decline in demand for palladium and platinum in the scenario of a global recession and as the share of electric vehicles in the world increases.


According to LMC Automotive, in May global light vehicle sales increased by 19% yoy to 7.7 million units. At the same time, for the first 5 months of 2023 global light vehicle sales grew by 11% yoy. It is noteworthy that the decline in prices for platinum and palladium is observed, despite the expected deficit of these metals in 2023. The World Platinum Investment Council believes that the shortage of platinum in the global market in 2023 could reach almost 1 million troy ounces. Whereas, Nornickel, world’s largest palladium producer, expects a palladium deficit of 200 thousand troy ounces in 2023.