January 14, 2025 | Mean Reversion

MARKETS

S&P 500: Down -7 points to 5829, VIX: 19.01

Asia: Japan -1.83%, China +2.54%, Hong Kong +1.83%

Europe: Euro Stoxx 50 +0.55%, FTSE -0.26%, DAX +0.62%

FX: USD (DXY) down 0.58%, EUR up 0.56%, GBP up 0.05%, JPY down 0.26%, CNY up 0.01%

Energy: WTI Crude down 1.28% to $77.78, Brent down 0.90% to $80.29

Cross markets: Terminal rate unch at 4.33, Implied rate cuts 2-years from terminal down ~3bp at 44bp, 2/10 yield spread +42bp

Treasuries: 2-year yields down ~1bp at 4.371%, 10-year yields up ~1bp at 4.788%, 30-year yields up ~3bp at 4.987%

WHAT WE'RE THINKING

Snapshot: US equities?are mixed with the equal weight S&P outperforming cap-weighted benchmarks for a second day.??The early uptick in equity futures followed a cooler PPI print and reports suggesting that Trump tariffs could be implemented gradually.??Payments, banks and asset managers outperform on the PPI reprieve, while mega-cap Tech/Comm Services are mostly lower. META and NVDA are idiosyncratic mega-cap laggards, while negative revenue updates from LLY and CRL weigh on the broader Health Care sector.??Independent power producers/Utilities leg higher with VST, CEG, SRE and NRG as top performers – and rate sensitive groups like home builders/building products bounce off the bottom. Treasury yields are mixed with curve steepening and the Dollar Index is lower after advancing for the last five sessions.??Gold and copper are a touch higher, while WTI crude trades off -1.2% after gaining +7.5% over the last two days.

• December PPI came in cooler than expected with prices up +0.2% MoM vs. consensus for +0.4% but remains elevated at a YoY rate of 3.3%. Energy costs rose +3.5% (fastest increase since Feb ’24) on tighter inventories and recent reports of tougher sanctions on Russian crude imports. Core PPI also came in below consensus, unchanged on a MoM basis (lowest since Jul ’24) vs. expectations for +0.3% leaving the YoY figure flat at 3.5%.??The report is a mild relief for markets after Friday’s hotter Jobs Report, but bond yields are little changed ahead of tomorrow’s December CPI report.?
• The December NFIB small business optimism index surged for a second straight month to reach a six-year high.?
• KC Fed President Schmid reiterated comments from last week about favoring gradual policy adjustments going forward but added the Fed will be ready to act if Trump tariffs impact inflation/employment.?NY Fed President Williams?is scheduled to speak later this afternoon.??
• On the topic of tariffs, market participants are hoping Bessent’s confirmation on Thursday could add incremental context, but the topic will likely remain influx for several more weeks at least.?
• In addition to CPI, tomorrow brings ? the Empire manufacturing index and home prices along with?comments from the Fed's Barkin, Kashkari, Williams and Goolsbee. CQ4 earnings season also kicks off tomorrow with C, BK, BLK, GS, JPM and WFC scheduled to report before the open, while TSM earnings on Thursday morning looks like the next major catalyst for the Tech sector and NVDA specifically. December retail sales (inflation implications), import/export prices, homebuilder sentiment and weekly jobless claims are due on Thursday with industrial production and housing starts/building permits closing out the week on Friday.??
• Overseas developments are mostly focused on monetary policy with the ECB’s Rhen projecting that policy rates will no longer be restrictive by the middle of ’25.??According to reports, the BOJ hasn’t yet made a decision on whether to hike rates as members prefer to wait for more US policy clarity.

Transition: The recent choppy pullback in US equity markets reflects expectations for fewer Fed rate cuts in ’25 and higher bond yields amid an uncertain policy transition.??The distribution of potential outcomes is widening as participants debate the sequence of Trump 2.0 policies, which is leading to portfolio risk reduction.??In our opinion, this uncertainty discount will unwind soon after the inauguration, but will likely return as investors jump from one headline to another.??This suggests a period of elevated implied equity volatility, which means higher risk premia/lower multiple – for now.??We’re still in a bull market and expect the overall trend is still higher but the degree of difficulty is also higher.?

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Short-term SPX: The S&P 500 (SPX) is ~4% off its all-time high from December 6 and nearly oversold after filling the post-election upside gap at ~5783.??The index broke below its 100-day moving average (~5825) yesterday before reversing higher to avoid CTA momentum selling.??Yesterday’s reversal also triggered bullish momentum divergence signals that implies a period of mean reversion.??If we’re wrong, a break below the 100-day moving average opens the door to next level support at 5626, which implies another ~4% downside from current levels. That type of outcome would align with our potential 10-year yield test at 5%.??As we noted yesterday, we’d first view that kind of test as a major buying opportunity for both bonds and stocks.??

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Inflation: We’re less concerned about inflation than the average market participant at the moment.??While tariffs are generally inflationary, the incoming administration should have ample policy offsets (particularly energy prices) at their disposal.??The incoming administration is also acutely aware that the public hates inflation.??Inflation wasn’t even an economic concern in the early-2019, but the first Trump administration dialed back/canceled tariff plans to avoid higher-priced consumer goods. We also see the recent pullback in shelter inflation continuing as high frequency rent measures remain materially lower than the CPI basket and declining US immigration could accelerate the trend.??

FACT OF THE DAY

A group of panda bears is called an Embarrassment.

JSC IN THE MEDIA

Consumer Confidence Falls: Andrew joins Bloomberg Businessweek to discuss market outlook for 2025. Skip ahead to the 7:56 mark for Andrew’s commentary. Listen Now

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Outlook for Mag 7: Andrew joins a Schwab Network panel to discuss the narrowing gap between the Magnificent 7 and the rest of the S&P 500. Watch Now

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Markets react as tensions rise in the Middle East: Andrew comments on recent events in the context of a market that is richly valued and therefore more sensitive to shocks of all kinds. Read on Reuters

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See more of JSC in the Media.

THIS DAY IN HISTORY

January 14, 1954: Baseball player Joe DiMaggio and actress Marilyn Monroe married at City Hall in San Francisco.??And now, people camp out at City Hall to catch a glimpse of the next celebrity wedding.? ??

CATALYST CALENDAR

Tomorrow: 1) US December CPI; 2) Empire Manufacturing index for January; 3) UK December CPI; 4) EU industrial production for November; 5) Sweden December CPI; 6) Japan December PPI; 7) Australia jobs report for December and; 8) earnings before the open: C, BK, BLK, GS, JPM, WFC. After the close: CNXC, FUL, HOMB, SNV. EU earnings: Diploma, Experian, Vistry.

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Thursday: 1) US retail sales for December; 2) US import/export prices for December; 3) US weekly jobless claims; 4) Philadelphia Fed index for January; 5) the NAHB housing index for January; 6) UK GDP and industrial/manufacturing production for November; 7) China Q4 GDP; 8) China retail sales/industrial production for December and; 9) earnings before the open: BAC, FHN, INFY, MS, MTB, PNC, TSMC, UNH, USB. After the close: OZK. EU earnings: Richemont.

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Friday: 1) US housing starts/building permits for December; 2) and US industrial production for December; 3) UK retail sales for December and; 4) earnings before the open: CFG, FAST, HBAN, RF, SLB, STT, TFC.

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.