Last week, the U.S. stock market showed some divergence. The Federal Reserve's decision implied a rate cut once this year, and concerns about the economy put pressure on the Dow Jones and Russell 2000 indices, which reflect the macroeconomic situation, causing them to retreat. However, the cooling of inflation indicators reignited hopes for an early rate cut, and the optimism in artificial intelligence led by Apple, Broadcom, and Adobe once again ignited investors' enthusiasm.

In the coming week, against the backdrop of an economic slowdown and policy game-playing, the market's direction will depend on the resilience of technology stocks and the trend of U.S. Treasury yields.

The hope for a rate cut in September has made a comeback.

The Federal Reserve kept interest rates unchanged for the seventh consecutive time in last week's interest rate meeting. In the much-anticipated quarterly economic outlook (SEP), core inflation and interest rate expectations were revised upwards, with the prediction for a rate cut this year dropping from three times in March to once. Federal Reserve Chairman Powell said at a press conference that a series of recent inflation data showed signs of cooling price pressures. However, more good data is needed to strengthen our confidence that inflation is moving sustainably towards 2%.

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It is worth noting that a series of data released this week seems to be moving in the direction that the Federal Open Market Committee (FOMC) hopes to see. In terms of price indicators, the U.S. Consumer Price Index (CPI) for May unexpectedly remained unchanged, the lowest since July 2022. Since March, the U.S. CPI has been on a downward trend. The Producer Price Index (PPI), which measures upstream costs, fell by 0.2% month-on-month, the lowest in nearly half a year, and the previously high-pressure service costs fell to 0 month-on-month, excluding energy prices.

Bob Schwartz, a senior economist at Oxford Economics, told First Financial Daily that the CPI in May was lower than expected and showed continued disinflation progress, which would be welcomed by the Federal Reserve. "However, after a series of unfavorable inflation data at the beginning of the year, the Federal Reserve will need more evidence to ensure that inflation achieves its target."

In terms of the job market, the number of initial jobless claims last week reached 242,000, the highest in 10 months, indicating that the labor market is losing momentum. This is consistent with the previously released JOLTS job vacancies continuing to decrease and ADP employment numbers falling back.

Investors' expectations for a shift in monetary policy have heated up. Long-term Treasury yields have fallen sharply, with the 2-year U.S. Treasury, which is closely related to interest rate expectations, falling 18.6 basis points to 4.68% for the week, the largest drop in five weeks, and the benchmark 10-year U.S. Treasury fell 21.6 basis points to 4.21% for the week. According to the FedWatch tool of the Chicago Mercantile Exchange, there is a 61% chance that the Federal Reserve will cut rates by 25 basis points in September, and the possibility of at least two rate cuts by December has returned to above 70%. Institutions also have different judgments on the timing of the first rate cut. UBS Global Research said that it currently expects the Federal Reserve to cut rates in December rather than September, while Goldman Sachs and Morgan Stanley continue to expect the first rate cut in September.

Compared to the market's optimism, the speeches of Federal Reserve officials after the interest rate meeting remain cautious. Both Chicago Fed Chairman Goolsbee and Cleveland Fed Chairman Mester emphasized that they want to see favorable data before cutting rates.

Schwartz told First Financial Daily that, as Federal Reserve Chairman Powell emphasized, policy decisions will depend on the data. "A solid labor market allows the Federal Reserve to flexibly give more weight to inflation in policy decisions. The Federal Reserve will still need several months of low inflation data to be confident enough to consider cutting rates." In his view, a rate cut in September remains an important option on the Federal Reserve's table.Can Market Momentum Continue?

Driven by hopes for a Federal Reserve policy easing and a surge in technology stocks, the S&P 500 and the Nasdaq have risen for seven consecutive weeks.

Artificial intelligence continues to be the main player in the market. Apple regained the top spot in the U.S. stock market value last week, sparking optimism about an upcoming wave of device upgrades after showcasing new AI features at the Worldwide Developers Conference (WWDC) keynote. Meanwhile, Nvidia and Microsoft also performed well, with the three giants' market value all surpassing the $3 trillion mark.

However, amidst the optimism, concerns about whether the economic slowdown under Federal Reserve policy is too rapid still exist, with the Dow Jones and the small-cap index Russell 2000 falling against the trend last week.

It is noteworthy that concerns about the uncertainty of Federal Reserve policy led to a significant outflow from U.S. stock funds last week. Data provided by the London Stock Exchange Group (LSEG) to First Financial Daily reporters showed that U.S. stock funds had a cumulative net reduction of $21.93 billion last week, a new high in nearly a year and a half, with the technology sector being the only net buying sector. Driven by a risk-avoiding sentiment, money funds "collected" $20 billion, with the total scale reaching a new historical high.

Charles Schwab wrote in its market outlook that the rise in U.S. stocks was due to lower-than-expected inflation data and a corresponding 20 basis point decline in the yields of 10-year and 2-year Treasury bonds. However, not everything is dovish, as the Federal Reserve's dot plot only expects one rate cut. In fact, the S&P 500's 14% increase in 2024 is largely attributed to the rise of large technology stocks. So far this year, the S&P equal-weighted index has only risen by 3.2%. Incremental investments still seem to be seeking what is considered the "safest" place - star technology stocks.

The institution believes that there are some worrying factors for the coming week. From a technical perspective, the market is somewhat overbought (especially in the technology sector), and secondly, there seems to be no short-term catalyst to push up the market after Nvidia's split and Apple's launch (Micron Technology's earnings and May PCE are due in two weeks), and the risk-reward begins to tilt towards a pullback, depending on whether the technology sector can generate sustained buying momentum.