U.S. investors heavily bought into equity funds ahead of a crucial inflation report spurred by expectations of continued moderation in inflation that could prompt the Federal Reserve to announce rate cuts.
They pumped a robust $16.37 billion into U.S. equity funds during the seven days to June 26, the highest amount in a week since June 14, 2023.
Investors awaited the 1230 GMT release of the Federal Reserve’s favored inflation gauge, the personal consumption expenditures (PCE) price index, expecting a moderation to an annual growth rate of 2.6% in May.
U.S. large-cap funds led the market, attracting a significant $21.28 billion, the largest weekly inflow since at least September 2020, while small-cap funds also saw net inflows of $38 million. In contrast, mid-cap and multi-cap funds experienced outflows of $690 million and $186 million, respectively.
Meanwhile, investors withdrew $141 million from U.S. sectoral equity funds, reversing three weeks of net purchases. Specifically, they pulled $391 million from healthcare funds and $302 million from real estate funds but invested $452 million in industrials.
U.S. bond funds experienced approximately $1.64 billion in net purchases, marking the fourth consecutive week of inflows. U.S. government and treasury fixed-income funds attracted about $2.05 billion, continuing the buying trend for the seventh straight week.
Additionally, U.S. general domestic taxable fixed-income funds saw $1.26 billion in inflows, although there were withdrawals worth about $1.14 billion from short/intermediate investment-grade funds.
At the same time, money market funds saw $6.54 billion worth of net selling, the second weekly outflow in a row.
A series of upcoming economic reports and Congressional testimony from Federal Reserve Chairman Jerome Powell could jolt U.S. government bonds out of a narrow trading range.
Yields on benchmark U.S. 10-year Treasuries, which move inversely to bond prices, have bounced between about 4.20% and 4.35% since mid-June, as the market digested data showing slowing inflation and signs of cooling economic growth in some indicators. The 10-year yield stood at 4.33% on Friday.
So far, the economic numbers have failed to dispel doubts over how deeply the Fed will be able to cut interest rates this year, keeping Treasury yields range-bound. But next week’s U.S. employment data, followed by inflation numbers and Powell’s appearance could change that outlook.
“The market has settled into a narrative that we may see incremental softness but not a growth scare,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. “That will continue to keep us in this range, but the one thing that will push it meaningfully lower is an increase in the unemployment rate.”
U.S. monthly inflation as measured by the personal consumption expenditures (PCE) price index was unchanged in May, a report released on Friday showed, advancing the narrative of slowing inflation and resilient growth that has tamped down bond market gyrations and buoyed stocks in recent weeks. Yet futures linked to the fed funds rate showed traders pricing in just under 50 basis points of rate cuts for the year.
Market reactions to employment data, due next Friday, could be exacerbated by low liquidity during a week when many U.S. bond traders will be on vacation for the July 4th U.S. Independence Day holiday, said Hugh Nickola, head of fixed income at GenTrust.
“The market is waiting for the other shoe to drop.”
A recent survey by BofA Global Research showed fund managers the most underweight bonds since November 2022. Some believe that means yields could fall further if weakening data bolsters the case for more rate cuts and spurs increased allocations to fixed income.
Other highlights for the month include consumer price data scheduled for July 11. Powell is scheduled to give his semiannual testimony on monetary policy on July 9 at the Senate Banking Committee, said the office of its chairman, Senator Sherrod Brown, on Monday. If tradition holds, the Fed Chair will deliver the same testimony at the House Financial Services committee the following day.
Some investors are not convinced Treasury yields have much further to fall. Despite its recent cooling, inflation has proven more stubborn than expected this year, forcing the Fed to rein in expectations for how aggressively it can cut rates. A recent unexpected inflationary rebound in Australia underscored how difficult it has been for some central banks to keep consumer prices under control.
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