July 5, 2024 | Unexpected Increase in the Unemployment Rate

MARKETS

S&P 500: Up +26 points to 5563, VIX: 12.32

Asia: Japan unch, China -0.26%, Hong Kong -1.27%

Europe: Euro Stoxx 50 -0.26%, FTSE -0.59%, DAX +0.08%

FX: USD (DXY) down 0.18%, EUR up 0.15%, GBP up 0.38%, JPY up 0.35%, CNY down 0.01%

Energy: WTI Crude up 0.52% to $84.32, Brent up 0.39% to $87.76

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~5bp at 151bp, 5/10 yield spread +5bp

Treasuries: 2-year yields down ~10bp at 4.608%, 10-year yields down ~9bp at 4.273%, 30-year yields down ~6bp at 4.468%

WHAT WE'RE THINKING

US equities?are mostly higher with the S&P 500 (SPX) and Nasdaq 100 (NDX) both on track for solid weekly gains and record closing highs. Narrow market breadth continues to be an issue with the Equal Weight S&P (SPW) and Russell 2000 (RTY) on track to close lower on the week.??Mega-cap ‘Tech’ is outperforming on a preference to own secular growth stocks amid today’s data-driven pullback in bond yields.??Tech is also helped by positive Q2 earnings reports from Samsung, Foxconn and Aixtron. AMD is the best performing stock in the SPX after a sell side upgrade that also called out TSM as top picks within semis.??Broadline retailers trade higher on M&A headlines that include Saks buying Nieman Marcus and M receiving a higher takeout bid. Cyclical/value stocks are weakest with notable underperformance in oil field services, banks, capital goods and transports. Treasury yields are lower for a third straight session and erasing most of last week’s backup.??The Dollar Index is lower as 2-year yields fall -10bp.

Gold is up >1% with the weaker dollar, WTI crude ticks higher and copper extends its weekly advance from oversold levels.

• June nonfarm payrolls increased +206,000 vs. consensus for +190,000, while the trend of downside revisions continues with a total of -110,000 jobs coming out of May and April data. Wages were in line at +0.3% MoM and +3.9% YoY (lowest since May ’21), down from +4.1% in May, while a surprise uptick in the Unemployment Rate (UR) to +4.1% catches the attention of markets.??
• The small upside surprise in the UR may be unremarkable on the surface, but it takes the 3-month average increase to +0.43%, which comes very close to triggering the Fed’s Sahm Recession Indicator of +0.50%. Net/net, the June Jobs Report is just the latest sign of cooling US economic momentum with market-based probability of a September Fed rate cut rising to 82%.??
• Takeaways from June FOMC minutes out Wednesday are mostly dovish with members highlighting inflation progress and sounding increasingly concerned about growth/employment outlook.
• Overseas headlines are mostly focused on the UK election outcome (as expected) and Sunday’s second round of French elections. On the data front, German Factory Orders, and Industrial Production both surprised to the downside, while Eurozone retail sales missed by a small margin. There was also cooler overnight inflation data out of Switzerland and SE Asia.?

Crowding: An apparent loss in US economic growth momentum is taking bond yields lower and driving further rotation into defensive secular growth stocks (mega-cap Tech) at the expense of cyclically exposed equity groups. Equity investors are in a selective ‘bad news is good’ phase for now, but that could change if the loss of momentum accelerates amid still sticky core inflation.??

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SPX: The SPX is extending just beyond our price objective of 5550 in a low attendance/light volume session.??The close matters most to market technicians, but we wouldn’t be surprised by higher levels given positive early-July seasonality and cautious near-term equity sentiment.??Equity prices move in response to estimate revisions with CQ2 earnings season kicking off later next week. The bottoms-up consensus forecast for ~9% YoY SPX earnings growth in Q2 is a high bar with forward guidance influencing early calendar ’25 estimates. This is the time of year when analysts and PMs begin to focus on out-year estimates.??The ‘opening bid’ for out-year earnings estimates tends to start high with sell side industry conferences in September providing management teams an opportunity to lower the bar. In my opinion, this dynamic accounts for much of the poor historical performance during the month of September and early October.

FACT OF THE DAY

A pen knife got its name because it was used for sharpening a quill to make the nib of a pen.

JSC IN THE MEDIA

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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Arm Holdings (ARM) is Not a Beneficiary of A.I. Right Now: Although ARM fell following underwhelming F25 revenue guidance, Andrew highlights how the company is on track to ultimately benefit from increased demand for accelerated compute and A.I. workloads. 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

See more of JSC in the Media.

THIS DAY IN HISTORY

July 5th, 1996: Dolly, a female Finn Dorset sheep, was born near Edinburgh, becoming the first successfully cloned mammal; her birth was not publicly revealed until the following year.

CATALYST CALENDAR

Sunday: Second round of the French election

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Next week: 1) Powell’s testimony before the Senate Tuesday; 2) China’s CPI/PPI for June Tuesday; 3) US CPI for June Thursday; 4) China’s import/exports for June Thursday; 5) US PPI for June Friday. Earnings highlights: 1) Thursday am: CAG, DAL, PEP 2) Friday am: BK, C, FAST, JPM, WFC

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.