Markets Wrap (1–15 June)

Stocks
Following the recent stock market rally, the forward 12-month price-to-earnings ratio of the S&P is within reach of its 5-year average value, whereas the corresponding measure for Stoxx Europe 600 is well below it (Chart 1). The upbeat mood in the market, closely related to an AI-inspired boom, has largely benefitted large-cap tech stocks, which have a far greater weight in the US market than elsewhere. 

Inflation
Price growth in the US decelerated further in May and was more or less in line with consensus forecasts. Year-over-year CPI settled at 4.0%, core inflation – at 5.3% (versus expected 4.1% and 5.2% respectively). Energy prices declined and food price growth normalized, but larger increases for rents and used cars continued to drive core inflation.

Central banks
The FED did not raise interest rates for the first time since January 2022 at its June meeting, but J. Powell sent a strong signal that the market should not interpret it as the end of the tightening cycle. FED's updated dot plots (Chart 4) imply two more hikes by the end of 2023 and cuts afterwards, whereas the market seems to think that one 25 bps increase is in the cards. As previously, the FED will proceed with shrinking its balance sheet by USD 95 billion per month. 

The ECB, as expected, raised interest rates by 25 bps to 3.50% (deposit facility), 4.00% (main refinancing rate) and 4.25% (lending facility). At the press conference, Ch. Lagarde sent a strong signal that a pause in monetary policy tightening was not even discussed, and another hike is very likely in July. Interest rate futures indicate that two more 25 bps hikes are expected by the market – in July and the ultimate one either in September or October, before the ECB  starts loosening its stance at the beginning of 2024. Ch. Lagarde mentioned "unit labour costs" several times during the press conference, which is a sign that the labour market is becoming an increasing focus of the ECB as a source of inflationary pressures (unemployment rate dropped to the lowest level on record of 6.5% in April). 

Commodities
Natural gas prices in Europe almost doubled over the previous two weeks on hotter weather forecasts, which portend stronger demand than previously expected. Another factor that is driving prices up is tighter competition from Asia (both Europe and Asia compete for liquified natural gas shipments from the US and the Middle East). 
Oil prices remain on a moderate downtrend despite shocks from surprise production cuts by both OPEC+ and Saudi Arabia additionally. Excluding Covid-19 era curtailments, Saudi Arabia cut its output to the lowest level in over a decade, but traders are becoming less responsive, as the immediate price gain quickly evaporated following the decision. Bears' confidence is fuelled by Russian shipments, which are booming despite sanctions, and concerns related to China's economic recovery.