January 21, 2025 | Broadening Out

MARKETS

S&P 500: Up +43 points to 6040, VIX: 15.23

Asia: Japan +0.32%, China -0.05%, Hong Kong +0.91%

Europe: Euro Stoxx 50 +0.03%, FTSE +0.33%, DAX +0.25%

FX: USD (DXY) down 1.27%, EUR up 0.05%, GBP up 0.02%, JPY up 0.08%, CNY up 0.10%

Energy: WTI Crude down 1.84% to $76.45, Brent down 1.07% to $79.27

Cross markets: Terminal rate unch at 4.33, Implied rate cuts 2-years from terminal down ~4bp at 58bp, 2/10 yield spread +29bp

Treasuries: 2-year yields unch at 4.278%, 10-year yields down ~6bp at 4.57%, 30-year yields down ~6bp at 4.799%

WHAT WE'RE THINKING

Snapshot: US equities are extending last week’s rally on the absence of new tariff announcements on day one.??The rally continues to be broad-based with the equal-weight S&P building on last week's ~100bp outperformance vs. the cap-weighted S&P 500 (SPX).??The Russell 2000 (RTY) also continues to outperform, while the Nasdaq 100 (NDX) trails as crowded positioning in mega-cap Tech unwinds a bit.??Shares of AAPL remain under pressure after a sell-side downgrade and reports that iPhone sales in China fell -18% in Q4.??REITS and Financials continue to recover on the pullback in bond yields with SCHW an upside standout after a solid EPS beat.??Industrials are broadly higher with defense contractors on top with airlines close behind into UAL earnings due after the close. Treasury yields are mixed with curve flattening.??The dollar is slightly weaker vs. major currencies after a much larger move yesterday when US markets were closed. Gold is up +1.2% on the weaker dollar, while copper and WTI crude trade lower.??

• The main driver this morning was the lack of major tariff announcements on day one, while Trump’s subsequent warning of 25% tariffs on imports from Canada and Mexico as soon as February 1 is viewed as the opening bid in negotiations.??
• It’s a quiet week in terms of US macro data with weekly jobless claims on Thursday followed by flash manufacturing/services PMIs, final University of Michigan consumer sentiment (with inflation expectations) for January and December existing home sales due on Friday.??
• There will also be no Fed commentary this week with the blackout period in effect ahead of next Wednesday’s FOMC meeting where the committee is widely expected to leave rates unchanged.??Market-based probability for a 25bp rate cut at the March meeting is just below 30%.
• Elsewhere, reports discuss China’s reluctance to materially weaken the yuan in response to potential tariffs given ongoing concerns of capital outflows.??Reports also suggest the BOE could slow or halt QT to reduce the upward pressure on gilt yields.??The UK’s latest employment report revealed evidence of a cooling in job creation, while labor costs remained elevated.??The expectations component of Germany’s January ZEW survey fell to 10.3, down from 15.7 in December and below consensus expectations for 15.1.??
• The list of previously unmentioned earnings-driven winners includes FITB, MMM and PLD, while shares of DHI and KEY trade lower after reporting.??Earnings highlights after the close include results from COF, NFLX, STX and UAL.?

Narrative: The fundamental drivers of the risk-on rally have been lower bond yields and a strong start to CQ4 earnings season.??Ten-year yields fell ~13bps last week to close the week at 4.60% amid a dovish CPI print.??Hawkish rate assumptions unwound as that level falls comfortably below prior resistance at 4.71%. Combining the dovish CPI print with the December Jobs Report gives you a Goldilocks macro backdrop that should support continued earnings growth.??Large cap banks kicked off Q4 earnings season with solid revenue performance, while credit metrics remained healthy.??In addition, results from TSM helped reestablish a bullish AI semiconductor narrative, while solid Q4 results from Richemont hinted at an eventual recovery in European domestic demand.??

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Rotation? The RTY and SPX triggered bullish momentum divergence signals last Monday, while the same reversal indicators weren’t present in the NDX.??On Tuesday, we suggested the RTY had greater upside than the SPX because it was more deeply oversold, not because there were indications of an enduring cyclical rotation.??We expect more near-term upside in the RTY, but don’t expect a broad cyclical rotation at the expense of mega-cap Tech – at least not yet – given that cross market indicators (copper/gold futures ratio) and internal indicators (RTY/NDX ratio) remain at subdued levels.? ?

FACT OF THE DAY

Rob Lowe, Robert Downey Jr., Charlie Sheen, and Sean Penn all went to Santa Monica High School at roughly the same time.??The first three were all in the same graduating class (1983) and Penn is 4 years older (graduated in 1978 and basically looks like he was Jeff Spicoli in HS). Robert Downey Jr isn’t wearing a tie because he dropped out Jr year to pursue acting full time.??

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 21, 1813: Spaniard Don Francisco de Paula y Marin plants coffee in Hawaii, the first record of coffee planting on the islands.??

CATALYST CALENDAR

Tomorrow: 1) US December Leading Index; 2) South Korea Q4 GDP; 3) Japan exports/imports for December and; 4) earnings before the open: ABT, ALLY, APH, BKU, CBSH, CMA, GEV, HAL, JNJ, OFG, PG, TDY, TEL, TRV, TXT. After the close: AA, BANR, CACI, DFS, HXL, KMI, KNX, PLXS, SLG, STLD. EU Earnings: Easyjet.

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Thursday: 1) US weekly jobless claims; 2) Singapore December CPI; 3) Taiwan industrial production for December; 4) Japan December national CPI and; 5) earnings before the open: AAL, ALK, BANC, FCX, ELV, GE, MKC, NTRS, TCBI, UNP, VLY. After the close: ASB, COLB, CSX, EWBC, ISRG, SLM, TXN. EU earnings: Essity, Sandvik, Swedbank.

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Friday: 1) US flash PMIs for January; 2) Final US Michigan sentiment report for January; 3) US existing home sales for December; 4) Eurozone flash PMIs for January; 5) UK flash PMIs for January; 6) Taiwan Q4 GDP and; 7) earnings before the open: AXP, HCA, NEE, VZ. EU earnings: Burberry, Ericsson, Signify.

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.

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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.