July 11, 2024 | Early Rotation and Key RTY Level

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MARKETS

S&P 500: Down -18 points to 5615, VIX: 12.75

Asia: Japan +0.94%, China +1.06%, Hong Kong +2.06%

Europe: Euro Stoxx 50 +0.43%, FTSE +0.32%, DAX +0.65% FX: USD (DXY) down 0.65%, EUR up 0.41%, GBP up 0.56%, JPY up 1.85%, CNY up 0.24%

Energy: WTI Crude down 0.04% to $82.07, Brent up 0.05% to $85.11

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~1bp at 159bp, 5/10 yield spread +5bp

Treasuries: 2-year yields down ~12bp at 4.505%, 10-year yields down ~10bp at 4.181%, 30-year yields down ~9bp at 4.390%

WHAT WE'RE THINKING

Snapshot: US equities?are mixed with a cooler CPI print driving rotation into cyclical/value stocks at the expense of momentum. This has the cyclically sensitive Russell 2000 (RTY) and Equal Weight S&P 500 (SPW) outperforming, while the cap weighted S&P 500 (SPX) and Nasdaq 100 (NDX) lag.??Market breadth improves with rate sensitive groups like homebuilders, building products, rooftop solar, towers and regional banks at the top of the performance table.??REITS and Utilities outperform as bond proxies with Industrials, Materials and Energy close behind.??Semis and mega-cap Tech see profit taking, while airlines sell off on weaker DAL guidance from an apparent loss of pricing power that also showed up in today’s CPI report.??Underwhelming results from CAG and PEP also fit the ‘downside of disinflation’ theme.??Treasury yields are lower across the curve with 2-year yields slipping below 4.50%.??The Dollar Index is lower with yen strength the biggest story in FX as the carry trade unwinds.??Gold is up nearly +2% on dollar weakness and crude prices lift for a second day.??

• Today’s sharp pullback in bond yields and rotation in cyclically sensitive equity groups follows a cooler-than-expected June CPI reading. Headline CPI fell -0.1% MoM vs. consensus for +0.1%, while the core rate ticked up +0.1% vs. the forecast for +0.3%.??Today’s print took YoY headline inflation to +3% vs. consensus for +3.1% and core inflation down to +3.3% from 3.4% last month. Gasoline, electricity, new vehicles, used vehicles and airfares were the largest contributors of MoM disinflation, while rent and OER saw their lowest monthly increases since August ’21.??
• Weekly jobless claims came in below consensus, which also helps ease concerns about weakening growth/labor markets.?
• Tomorrow brings US PPI for June and July Michigan consumer sentiment.?
• The Treasury is issuing $22B of 30-year bonds later today following well-attended 3 and 10-year auctions earlier in the week.??
• Geopolitical headlines follow NATO’s stern warning to China regarding its support for Russia’s war on Ukraine. Biden’s NATO press conference later today will likely attract outsized attention given renewed calls for him to step aside.
• China’s third plenum will take place next week (7/15-7/18) with no shortage of headlines covering steps the government has taken/will take to boost growth.??
• Shares of COST trade lower despite stronger-than-expected June comps and a long-expected increase to its annual membership fee.??A positive earnings preannouncement from AA generates upside, while MEI and WDFC advance after better than expected results.??No major earnings reports are scheduled for this afternoon with BK, C, FAST, JPM and WFC on deck for tomorrow morning.

Rotation: Today’s cooler-than-expected CPI print starts a knee-jerk rotation into cyclical/value equity groups at the expense of momentum stocks and YTD winners.??The first phase of rotation always begins with short covering that usually lasts for 3-5 trading days at a minimum.??Yesterday’s internal price action had all the characteristics of a short-squeeze with renewable energy, housing and rate sensitive groups getting a jump on today’s CPI print.??The positioning tailwind for these groups should last into next week with Tuesday’s retail sales report as a key near-term macro catalyst.??A cooler CPI report followed by a stronger retail sales number has the potential to make this a more lasting rotation led by cyclical stocks.

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RTY: Yesterday, we discussed the record 2-year performance gap between the RTY and SPX that seems unlikely to converge in the later stages of an economic cycle.??While still unlikely, today’s cooler CPI print puts the RTY catch-up trade back on the ‘watch list’ with a sustained break above ~2140 (long-term range resistance) as a preliminary stop-in level.? ??

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Next: Tuesday’s retail sales report is the next macro catalyst for markets that will be increasingly driven by CQ2 earnings season.??The bottoms-up consensus Q2 SPX estimate is for +8.8% YoY earnings growth, which seems like a high bar.??While index volatility remains subdued, option premium pricing on individual positions imply the highest level of earnings-day moves in 14 years.?

FACT OF THE DAY

In 1974 thousands of swallows completed their annual migration over the Swiss Alps to the Mediterranean via Swissair flights and on the Swiss Federal Railway. The insect population was scarce that year due to bad weather and the birds were too cold and hungry to migrate on their own.

JSC IN THE MEDIA

Bank Earnings Preview: Appearing on Schwab Network’s 360 Round, Andrew shares his ‘cautiously constructive’ view heading into bank earnings. Watch Now

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Fox Business News: Andrew joins Charles Payne on Making Money to discuss risks to the soft landing scenario and factors necessary to sustain the current bull market. Watch Video

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Macro Outlook and Mega Cap Tech: Andrew Graham joins Oliver Renick to discuss the outlook for mega cap tech and inflation, as well as Alphabet (GOOGL) and the A.I. race. Watch Video

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See more of JSC in the Media.

THIS DAY IN HISTORY

July 11, 1960: Novelist?Nelle Harper Lee publishes her first novel, To Kill a Mockingbird. Lee’s book became an immediate success, winning the Pulitzer Prize for Fiction in 1961 and selling over 40 million copies worldwide.

CATALYST CALENDAR

Tomorrow: 1) US PPI for June; 2) Japan’s industrial production for May; 3) India’s CPI for June and industrial production for May; 4) The Michigan sentiment report for July; 5) Earnings before the open: BK, C, FAST, JPM, WFC

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Sunday: China June industrial production/retail sales and Q2 GDP

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Next week: 1) China’s Q2 GDP and June IP/retail sales Sunday; 2) The GOP convention begins Monday; 3) Powell’s interview at the Economic Club of Washington Monday; 4) US retail sales report for June Tuesday; 5) UK CPI for June Wednesday; 6) Fed’s Beige Book Wednesday; 7) ECB decision Thursday. Earnings highlights: 1) Monday am: BLK, GS; 2) Tuesday am: BAC, MS, PNC, SCHW, STT, UNH; 3) Tuesday pm: JBHT; 4) Wednesday am: ELV, JNJ, PLD, SYF, USB; 5) Wednesday pm: AA, CCI, DFS, SLG, STLD, UAL; 6) Thursday am: ABT, BX, DHI, DPZ, MAN, MMC, TSM, TXT; 7) Thursday pm: ISRG, NFLX, PPG; 8) Friday am: AXP, CMA, FITB, HAL, RF, SLB, TRV

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.