April 3, 2024 | SPX Levels

MARKETS

S&P 500: Up +12 points to 5218, VIX: 14.39

Asia: Japan -0.97%, China -0.18%, Hong Kong -1.22%

Europe: Euro Stoxx 50 +0.52%, FTSE -0.05%, DAX +0.43% FX: USD (DXY) down 0.43%, EUR up 0.56%, GBP up 0.44%, JPY down 0.10%, CNY down 0.04%

Energy: WTI Crude up 0.93% to $85.94, Brent up 0.98% to $88.77

Cross markets: Terminal rate unch at 5.33%, Implied rate cuts 2-years from terminal up ~1bp at 168bp, 5/10 yield spread +1bp

Treasuries: 2-year yields up ~1.7bp at 4.706%, 10-year yields up ~3.4bp at 4.383%, 30-year yields up ~3.5bp at 4.529%

WHAT WE'RE THINKING

Snapshot: US equities are mostly higher after coming under pressure yesterday.??Energy is the upside standout for a second day followed by Industrials that outperform as shares of GE rally post-spin. Capital goods are also strong with CAT and PH leading the way.??Momentum and growth baskets trade well with WDC pulled along in MU’s ongoing advance.??ULTA is the worst performing stock in the S&P 500 (SPX) after the company issued a cautious outlook noting that some product categories are slowing faster than expected. FTNT trades higher after an upbeat analyst day, while INTC lags after disclosing metrics for Intel Foundry (IFS). Treasury yields are narrowly mixed with curve steepening after the two-day backup in yields. Ten-year yields at ~4.35% remain below key resistance levels near 4.40%. The Dollar Index is lower after today’s ISM services number narrows the perceived Fed/ECB policy differential. Gold is higher for a seventh straight session, copper continues to advance on expectations for increased power demand and WTI crude tests $85bbl for a second day.

• Today’s softer ISM services report offsets some of Monday’s hot ISM manufacturing print, which helps cool bond market volatility. March ISM services came in at 51.4 vs. consensus for 52.8 with the prices component falling 5.2 points to its lowest level since early 2020.??
• Equity markets initially sold off after a stronger ADP private payroll number and ULTA’s downbeat outlook. Note that ULTA is just the latest consumer facing (retailers/apparel) company to issue cautious guidance over the last few weeks, joining ASO, DRI, FIVE, LULU, NKE, PVH, SIG and others.?
• US auto sales for March may be another consumer-related red flag after the headline number missed with average selling prices down -3.6% YoY and issued discounts rising ~66%.??
• Morning comments from Fed Chair Powell are consistent with his message from the post-FOMC press conference.??Fed officials who spoke during yesterday’s session mostly reinforced rate expectations (75bp of cuts in ’24) from the most recent dot plot. However, Cleveland Fed President Mester managed to surprise markets when she suggested that R* (real neutral rate) may now be closer to 3% instead of 2.5%.??
• Eurozone CPI for March fell short of expectations and mirrors cooler France and Germany numbers from Monday. The ECB is now more likely to issue dovish forward guidance at its meeting next Thursday. The ECB’s Holzmann said he’s warming to the idea of a June rate cut but doesn’t want to get too far ahead of the Fed.??
• Elsewhere, China’s Caixin services PMI for March came in better-than-expected and the PBOC eased auto lending standards to support weak domestic sales.?
• Other earnings-driven outperformers from this morning include PLAY and CALM with earnings from LEVI, RGP and SLP due this afternoon.

SPX: Yesterday’s pullback in the SPX triggered a number of questions about whether this is the end of the rally.??The decline was the largest of the calendar year, but it's important to recognize that the SPX closed yesterday within 1% of its all time high that was set last week.??The term ‘pullback’ usually implies something like 2-3% and getting there likely requires a downbeat start to CQ1 earnings season (next Thursday) or higher bond yields.??In ten-year yield terms, the trigger for a more significant pullback looks like something north of 4.40%.??Equities are more sensitive to increased bond volatility than yield levels but 4.40% is significant because the November break below that level marked a change in trend.??The near-term bullish trend in the SPX stays intact above support at 5160 with a 2-3% pullback testing that level.??But a break below 5160 doesn’t signal an end to the rally.??In our opinion, that occurs on a break below 4980 where we’d expect to see increased selling momentum.

?

Inflation: Next Wednesday's CPI print is the most significant near-term catalyst for markets.??Monday’s improved ISM manufacturing report with a higher prices paid component followed a similar message in flash PMI data.??The survey provider of PMI (S&P Global) included the following commentary in the 3/21 report: ‘costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year. The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months.’?

?

More: The recent backup in bond yields and commentary like the above have markets somewhat prepared for a hot March CPI print. We also note that quarter-end rebalancing from last week may have played a part in this week’s yield backup.??Quarter-end rebalancing after significant (10%+) equity outperformance temporarily compresses bond yields and the ensuing backup in yields at the start of the new quarter tends to overcompensate – especially when liquidity is low.? ??

?

Next: Large cap banks kick off Q1 earnings season next Thursday but markets will be far more interested in Magnificent 7 reports that start on April 25.

?

Your feedback is always appreciated, and we’re around if you want to follow up on anything or run through any themes. –Andrew Book a call

FACT OF THE DAY

British singer Lily Allen’s 2007 single, ‘Alfie’ is about her lazy pothead brother and how she wants him to make something of his life instead of being a bum. Her pothead brother is Alfie Allen, the actor who played Theon Greyjoy in HBO’s ‘Game of Thrones.’??Here's Alfie pretending to like his sister in 2008...

WHAT WE'RE DOING

Adobe Plunges After Earnings: Andrew Graham and Keith Kirkpatrick join the Watchlist to discuss the outlook for Adobe. Although there are challenges in the near-term, Adobe may benefit from the adoption of generative AI over the longer term. Watch Now

The Road Ahead for the Fed: Speaking with Oliver Renick, Andrew notes there is a favorable outlook for equities as long as the macro environment remains benign. The two discuss the road ahead for the Fed, as well as how inflation is affecting markets and when to own small cap stocks. Watch Now

What do Advisors see for 2024? Speaking as one of five featured advisors on Barron’s Advisor Q&A, Andrew explores why we’d see a pull-back to start the year and predicts small-cap stocks will outperform large-caps for the year. Read More on Barron’s

See more of JSC in the Media.

THIS DAY IN HISTORY

April 2nd, 1892: Church minister John M. Scott and pharmacy co-owner Chester Platt claim to have invented the Ice Cream Sundae. Although there are many claims as to who invented the Sundae, theirs is the earliest claim with documented proof.??The two wrote a newspaper ad for an Ice Cream Sundae on April 5, in the Ithaca Daily Journal.

CATALYST CALENDAR

Tomorrow: 1) Eurozone services PMI for March; 2) Eurozone PPI for February; 3) ECB minutes from the March meeting; 4) US Challenger job cuts report for March; 5) US weekly jobless claims; 6) Earnings before the open: CAG, LW, RPM, SMPL

?

Friday: 1) US jobs report for March; 2) US consumer credit for February; 3) India/RBI rate decision; 4) Singapore’s retail sales for February; 5) Germany’s factory orders for February; 6) Eurozone retail sales for February

Jackson Square Capital produces Inside Markets. We also offer financial planning and investment management services. Learn more here and catch up on our recent media appearances.

Investment Advisory Services offered through Jackson Square Capital, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.