The Fed left rates unchanged at 3.5%-3.75%, while updated projections showed resilient employment, sticky inflation, and higher rate expectations versus March. The dot plot signaled a more hawkish stance. New Fed Chair Waller also announced a streamlined policy framework, the end of forward guidance, and a reform task force. Markets see a potential rate hike risk as early as September, though falling U.S. one-year inflation swaps suggest rates are likely to remain on hold this year. With AI-driven earnings momentum intact, we remain positive on technology, AI semiconductors, and both growth and cyclical stocks.
The U.S. and Iran announced a 14-point memorandum and agreed to 60 days of ceasefire negotiations, sending WTI crude below US$80/bbl. Lower energy cost expectations boosted risk appetite and supported global equities, with AI, technology, and semiconductor stocks leading gains. However, the Fed’s increasingly hawkish stance could drive Treasury yields higher and pressure equity valuations. Investors should also watch for heightened volatility around June 18 quadruple witching.
The Fed delivered a hawkish policy outcome, with officials raising their dot-plot projections closer to market rate-hike expectations. Economic forecasts continued to reflect solid fundamentals, reinforcing expectations for tighter policy. The U.S. Treasury yield curve flattened further, with the 10Y-2Y spread narrowing to 29 bps, near this year’s lows. In credit markets, both IG and HY spreads tightened, with HY outperforming on attractive carry. Easing Middle East tensions also supported inflows into EM bonds.
Data Center Demand Signals a New Growth Cycle for Analog Semiconductors
Explosive growth in data center demand is driving server rack power consumption above 100kW. As high-voltage power requires conversion and power management within servers, analog chip content is set to rise significantly. We expect the analog semiconductor market to deliver a 13.9% CAGR over 2025–2030. Unlike traditional industrial, automotive, and consumer applications that face pricing pressure from Chinese competitors, AI-driven data center demand should provide a longer-lasting growth tailwind for analog chipmakers across the U.S., Europe, and Japan.
A review of U.S. investment-grade (IG) credit conditions in May showed: (1) net rating upgrades rose to US$142bn from US$77bn in the prior month, while the share of issuers with positive outlooks remained above historical averages; and (2) although higher capex and debt issuance by technology firms reduced cash balances and lifted leverage, 1Q gross margins improved to 37.3%, underscoring the strength of IG credit fundamentals. This was also reflected in modest credit spread tightening.
While U.S. credit spreads remain near historical lows, yield-to-duration ratios for both IG and HY bonds are still around the upper end of historical ranges, suggesting valuations are not overly stretched. Compared with credit bonds, longer-duration Treasuries remain more sensitive to interest-rate movements. Absent a severe demand shock or recession, long-duration government bonds are unlikely to provide meaningful diversification benefits.
