To The Moon

Recap of Recent Market Events

The past trading week ended on a high note, with the $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ achieving record highs for the third and fourth consecutive days, respectively. The S&P 500 rose by 0.5%, and the tech-heavy Nasdaq increased by 0.9%. Even the Dow Jones Industrial Average, which lagged behind, gained 0.2% and is only 1.6% away from its May 17 high. $Tesla Motors(TSLA)$ $NVIDIA Corp(NVDA)$ $Meta Platforms, Inc.(META)$

US Index

The market rally was underpinned by a better-than-expected payrolls report for June, showing an addition of 206,000 jobs against the forecast of 190,000. This positive surprise, coupled with revisions that lowered April and May's job numbers by a combined 111,000, suggested a cooling economy, potentially prompting the Federal Reserve to consider rate cuts soon. This scenario is bolstered by a three-month payroll average of 177,000, the slowest pace since January 2021.

NFP

Consequently, the probability of at least one-quarter point rate cut by September has risen to 77% from 64% a week ago, as per CME FedWatch. This anticipation was reflected in the bond market, where the yield on the 10-year Treasury note fell by seven basis points to 4.272%, and the 2-year yield dropped nine basis points to 4.599%, its lowest level since March.

Rates

Market Scenario

The market scenario appears cautiously optimistic as investors digest recent data and anticipate future developments. The record-breaking performance of the S&P 500 and Nasdaq indicates strong investor confidence, underpinned by robust earnings expectations and potential monetary easing by the Fed.

The better-than-expected payroll report, coupled with downward revisions for April and May, paints a picture of a cooling economy. This cooling is significant because it reduces inflationary pressures, providing the Fed with more leeway to cut interest rates. The bond market's reaction, with significant drops in the yields of both the 10-year and 2-year Treasury notes, further supports this outlook.

However, the market is not without its challenges. The high expectations for corporate earnings mean that companies will need to deliver strong results to sustain the current rally. Any disappointment in earnings could lead to volatility and a potential pullback in the markets…

The upcoming consumer price index (CPI) report will be crucial in shaping market expectations for the Fed's next moves. A lower-than-expected CPI could reinforce the case for rate cuts, while a higher-than-expected reading might temper expectations and lead to increased market volatility.

Upcoming Catalysts

Next week is packed with key events that could significantly influence market sentiment:

1. Federal Reserve Chairman Jerome Powell's Testimony: Powell's Semiannual Monetary Policy Report to Congress on Tuesday and Wednesday will be closely watched for any hints on the Fed's future policy direction.

2. Consumer Price Index (CPI) for June: Scheduled for release on Thursday, the CPI report will provide critical insights into inflation trends. The consensus estimate is for a 0.1% increase, with core CPI expected to rise by 0.2%.

3. Corporate Earnings: The earnings season kicks off with reports from Delta Air Lines and PepsiCo on Thursday, followed by major banks like Bank of New York Mellon, Citigroup, $JPMorgan Chase(JPM)$ , and Wells Fargo on Friday. The market will be looking for confirmation of the expected 10.1% earnings growth for the S&P 500.

Conclusion

The markets are currently riding a wave of optimism, driven by strong corporate earnings expectations and the potential for Fed rate cuts. However, the high expectations mean that any negative surprises could lead to volatility. Key upcoming events, including Powell's testimony, the CPI report, and the start of the earnings season, will provide crucial insights into the future direction of the markets…

This report is for informational purposes only and does not constitute financial advice. Investing in financial markets involves risk, and you should consult with a qualified financial advisor before making any investment decisions.

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