As the saying on Wall Street goes, never go against the Federal Reserve. However, this is exactly what traders are doing now, and it may trigger a rapid rebound in some forgotten corners of the stock market...

Last week, the Fed's rate forecast and hawkish comments from Fed officials couldn't have been clearer - investors were warned over and over again that the time rates will remain high will be longer than expected, with the median forecast of the Fed's dot plot only one rate cut this year.

It is clear that the US bond market is giving investors a lesson in the "new world": Current data is far more important than anything the Fed says!

This was evident after last week's "Super Wednesday." In the morning, lower-than-expected May CPI growth triggered the biggest wave of bond market gains this year.

Less than six hours later, after the Fed's latest dot plot forecast expected only one rate cut this year, the momentum weakened slightly. But soon after on Thursday, PPI unexpected decline and initial jobless claims rose further indicating a slowdown in inflation, and bonds continued to expand their rally.

The 10-year Treasury yield, known as the global anchor for asset pricing, finally settled around 4.2% last Friday, falling 21 basis points for the week, the largest weekly drop since mid-December last year.

In short, dovish inflation data drowned out the hawkish voices of the Fed last week...

As economic data continues to surprise everyone, including central bank policy makers, all over the past few weeks, these changes highlight that the importance of Fed guidance has been greatly discounted. Fed Chairman Will also acknowledged this at last week's post-meeting press conference, saying that the Fed will pay attention to the direction of the data.

This may also mean that as more key data is released and the outlook for rates is reassessed, the bond market will continue to be volatile in the near future. The current cooling trend in data is certainly welcome, but whether it can continue remains to be seen. At a time when the market no longer believes in the guidance of Fed officials on interest rates, unexpected economic data could trigger market turbulence.

Jean Boivin, head of BlackRock's Investment Institute, said, "Fed policymakers will continue to speak, but in the current environment, their speeches will be subject to some discount." This is an environment that overreacts to macro data.

Undoubtedly, a series of economic data released in the United States recently has quietly enhanced investors' confidence - they are now more convinced that the Fed will start cutting interest rates later this year. Data from the derivatives market shows that traders expect the Fed to cut interest rates twice by 25 basis points this year, with the first cut expected in September.

This is undoubtedly more dovish than the Fed officials' latest June dot plot, whose median forecast is for one rate cut this year, lower than the three expected at the March meeting.

With the change in relevant rate expectations, a large amount of funds are also flowing into stocks that benefit from lower borrowing costs. According to data compiled by EPFR Global and Bank of America, funds flowing into the US technology sector reached $2.1 billion last week, the highest level since March.

Historically, interest rate cuts mark a key turning point and lead to strong stock returns. Of course, this is only applicable to cycles that are not caused by economic recession (at least not currently). This explains why the latest fund flow data from Bank of America and EPFR Global shows that money is flowing into the three important sectors closely related to the economy - finance, commodities, and utilities - as long as economic growth remains strong, these sectors are expected to benefit from the rate cuts.

At the same time, portfolio managers are also increasing their investments in technology stocks. The Nasdaq 100 index rose 17% in 2024. According to data compiled by Bloomberg, the average price-to-earnings ratio of the seven largest companies in the S&P 500 index is about 36 times, while the multiple of the benchmark index is only about 22 times.

Looking ahead to this week, the tense nerves of the market may relax temporarily - because no data of comparable importance to the past two weeks' employment and inflation reports are scheduled. Of course, many Fed officials will take turns to appear this week, which is also something they often do after interest rate meetings. However, as we mentioned above, the influence of Fed officials' speeches seems to be less important than the actual changes in economic data currently.

Terry Sandven, chief equity strategist at Bank of America Wealth Management, said that if the Fed can also adopt a dovish stance in the future, then defensive sectors such as consumer goods and real estate that can afford stable dividends will also become more attractive.

For the stock market, June is usually a quiet period for the market, and trading volume will decrease after entering the summer. However, this week, investors may still need to beware of one thing before the weekend - the quarterly "four witch days" is coming again. On Friday this week, equity index futures, equity index options, individual stock futures and individual stock options will all expire at the same time, combined with the quarterly rebalancing of some indices. This convergence often causes a wave of high volatility and high trading volume in the market. Therefore, this may disrupt market positions in the short term.

"Stock markets in the next week are likely to be quite volatile," says Frank Monkam, Antimo Senior Portfolio Manager.

Editor/Somer