July 15, 2024 | RTY Rally with a Catalyst Ahead

MARKETS

S&P 500: Up +25 points to 5641, VIX: 12.86

Asia: Japan closed, China +0.09%, Hong Kong -1.52%

Europe: Euro Stoxx 50 -1.17%, FTSE -0.86%, DAX -0.81% FX: USD (DXY) down 0.01%, EUR up 0.14%, GBP up 0.02%, JPY up 0.01%, CNY down 0.15%

Energy: WTI Crude down 0.44% to $81.87, Brent down 0.24% to $84.83

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~5bp at 181bp, 5/10 yield spread +10bp

Treasuries: 2-year yields unch at 4.449%, 10-year yields up ~3bp at 4.216%, 30-year yields up ~5bp at 4.441%

WHAT WE'RE THINKING

Snapshot: US equities are extending last week’s gains with continued outperformance from small cap stocks.??The equal-weight S&P 500 (SPW) is higher but lagging behind the RTY and cap weighted indices.??Cyclical/value stocks lead for a third straight session with notable outperformance in autos, regional banks, capital goods, oil field services, steel, homebuilders and building materials. The preference to own cyclically-exposed names put STLD, TSLA and HAL on top of the S&P 500 (SPX) performance table.??Mega-cap Tech performs well with AAPL higher on a sell-side upgrade, while GOOGL lifts on reports of a new M&A target and NFLX extends gains into Thursday’s earnings report. Utilities, Staples and Health Care underperform as defensive groups become a source of funds.??AES is the worst performing stock in the SPX after earnings. Rooftop solar and alt-energy stocks are notably weak on concerns that a Republican-led Congress could repeal some of the industry’s ‘Inflation Reduction Act’ tax benefits.??Treasury yields are mostly higher with curve steepening.??The Dollar Index is little changed. Gold is higher, while copper and WTI crude trade lower.??

• Markets are being driven by an increased probability for a September rate cut and an increased likelihood for the extension of current tax law under a Trump Presidency/GOP majority.??The combination results in a steeper yield curve and continued rotation into cyclically sensitive equity groups.??
• The theme will be tested tomorrow with the release of June retail sales.?
• The July Empire Manufacturing?index is today’s only US macro report. The headline came in a bit better than consensus with the employment component slightly higher MoM but still in contraction territory.??Prices paid edged higher, while prices received declined.??
• Chicago Fed President Goolsbee told the press over the weekend that interest rate cuts will soon be warranted. Chair Powell is currently being interviewed at the Economic Club of Washington DC with his early comments centered around increased confidence for inflation to return to the Fed’s 2% target. This week’s calendar includes speeches from ten other Fed officials.??
• Overseas developments are mostly focused on softer China activity data (retail sales and housing) for June and softer Q2 GDP.??Weaker data out of China combines with downbeat earnings reports from Burberry and Swatch to put increased downside pressure on European luxury names.??
• Pre-open results from BLK and GS are well received by investors with the Q2 earnings season set to ramp in coming days. Tomorrow morning brings results from BAC, MS, PNC, SCHW, STT and UNH.

RTY: The Russell 2000 (RTY) is up +6.4% (current intraday level) since Thursday’s dovish CPI print vs. down -0.4% for the SPX.??Most of the relative underperformance in the SPX came on Thursday when a knee-jerk response to the data resulted in rotation out of mega-cap Tech. Defensive sectors like Utilities, Staples and Health Care are usually the ‘source of funds’ for a cyclical rotation, while secular growth stocks advance but underperform on a relative basis.??In our opinion, the selling of mega-cap Tech on Thursday was due to stretched long positioning in Mag 7 names. Price action today better fits the template of a typical rotation as secular growth stocks advance but lag behind cyclical groups. On Friday, the RTY managed to close just above LT range resistance that we defined as ~2140. In our view, the index needs to sustain levels above ~2140 for 2-3 days to confirm the breakout. The early days (3-5 days) of any rotation are driven by short-covering with very light long positioning in small cap stocks adding fuel for the RTY rally to continue. However, a sustained RTY break above range resistance in the near term requires support from tomorrow’s retail sales number.??Most cyclical rotations follow a recession and start with expectations for large-scale monetary easing. A cyclical rotation from here requires the soft landing narrative (disinflation without a meaningful drop in growth) remains intact.?

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Rate cuts: The earliest calls for imminent rate cuts began almost a year ago with OIS markets reflecting increased probability.??At the time, we pointed to the still-flat 5-10 year yield curve as a reason to be skeptical. The 5-10 curve reached +6bp in early October before falling back into negative (inverted) territory.??In our opinion, an imminent Fed rate cut should be preceded by a change in trend for the 5-10 curve that we identified as ‘sustained levels above +19bp.’??We still see +19bp as the correct 5-10 yield spread that would signal a Fed rate cut 4-6 weeks forward.

FACT OF THE DAY

Balto, the famous dog from the 1920’s who helped save countless lives by delivering precious antitoxin from Anchorage to Nome is stuffed and mounted in the Cleveland Museum of Natural History.

JSC IN THE MEDIA

Technology stocks to continue rally: In a CNBC feature, Andrew shares why the AI theme is here to stay and how JSC portfolios have managed to outperform the market YTD. Read More

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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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See more of JSC in the Media.

THIS DAY IN HISTORY

July 15th, 1965: Mariner 4, an unmanned space probe launched by NASA in 1964, flew by Mars and returned close-up pictures of its surface, the pictures proving that the planet's rumored canals were actually illusions.

CATALYST CALENDAR

Tomorrow: 1) US retail sales report for June; 2) US import/export prices for June; 3) NAHB housing index for July; 4) German ZEW survey; 5) New Zealand’s CPI for Q2; 6) Earnings before the open: BAC, MS, PNC, SCHW, STT, UNH; 7) Earnings after the close: FULT, HWC, IBKR, JBHT

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Wednesday: 1) UK CPI for June; 2) US housing starts/building permits for June; 3) US industrial/manufacturing production for June; 4) Fed Beige Book; 5) Japan’s import/exports for June; 6) Australia’s jobs report for June; 7) Earnings before the open: ALLY, CFG, ELV, FHN, JNJ, NTRS, PLD, SYF, USB; 8) Earnings after the close: AA, BANR, CCI, DFS, EFX, FNB, FR, HOMB, OZK, REXR, SLG, SNV, STLD, UAL, WTFC

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Thursday: 1) UK jobs report for May; 2) Eurozone auto registrations for June; 3) ECB decision; 4) US weekly jobless claims; 5) Philadelphia Fed index for July; 6) US Leading Index for June; 7) Japan’s national CPI for June; 8) Earnings before the open: ABT, BKU, BX, CBSH, CTAS, DHI, DPZ, HXL, KEY, MAN, MMC, MTB, SNA, TCBI, TSM, TXT, VIR 9) Earnings after the close: AIR, ISRG, NFLX, PPG, SCHL

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Friday: 1) German PPI for June; 2) UK retail sales for June; 3) Earnings before the open: ALV, AXP, BMI, CMA, FITB, HAL, HBAN, 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.