Powell and Lagarde fail to upset the apple cart

The Fed held interest rates where they were but warned the market this does not signal the end of the tightening cycle; rates may need to rise further in pursuit of bringing inflation back to 2%. The ECB raised by 25 basis points, raising interest rates to 3.5%, the highest deposit rate for 22 years. Christine Lagarde likewise warned investors the ECB is not yet done.

Stock markets barely blinked as the S&P 500 continued its climb higher, despite Powell’s caution that the full effects of interest rate rises had not yet been felt. Equity markets were happy to focus on Chairman Powell’s acknowledgement that long-term interest rates remain anchored to  2%, and on his slightly more optimistic outlook for the US economy.. Predicting the US economy will grow around 1% this year and the next. Powell’s hawkish rhetoric was greeted with a euphoric stock market as the S&P 500 rose for the 6th day in a row, and all 11 sectors finished Thursday higher than where they started. For the bears, the pain goes on.

Why did stock markets not run for the hills? Powell painted a picture of an economy that is doing no worse and possibly slightly better than forecast. We then had a better-than-expected retail sales report and news that import-export prices were falling. Technology stocks had another good day as Adobe posted strong numbers as the CEO talked of the opportunities in AI, sweet music to tech investors, helping push that sector higher. As a result of a renewed love of technology stocks, and despite the relative attractiveness of US treasuries, coupled with a weak earnings outlook, the rise in US stock prices this year has resulted in an expansion in equity multiples. As the Wall Street Journal reported, Wall Street has officially erased more than a year of Fed-inflicted pain. The negative sentiment that ran through the month of May is being wiped away in June.

AI-related stocks, as is well reported, in particular the chip makers, not McDonald’s, but the likes of Nvidia, have been on a tear as stock investors look to the future demand. The current fundamentals paint another picture; new orders of chips are downbeat. The latest electrical Manufacturing PMI is below 50, indicating contraction, as demand and DRAM and Nand prices continue to fall. The fundamentals and stock prices are going in different conditions. Investors are very bullish this trend will change.