June 28, 2024 | Decelerating Momentum

MARKETS

S&P 500: Down -19 points to 5499, VIX: 12.22

Asia: Japan +0.61%, China +0.73%, Hong Kong +0.01%

Europe: Euro Stoxx 50 -0.28%, FTSE -0.03%, DAX +0.10%

FX: USD (DXY) down 0.07%, EUR up 0.10%, GBP down 0.01%, JPY down 0.04%, CNY up 0.02%

Energy: WTI Crude down 0.43% to $81.40, Brent up 0.06% to $86.44

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~2bp at 148bp, 5/10 yield spread +1bp

Treasuries: 2-year yields unch at 4.708%, 10-year yields up ~5bp at 4.333%, 30-year yields up ~7bp at 4.492%

WHAT WE'RE THINKING

Snapshot: US equities are mostly lower and off best levels. Equity performance since mid-week has favored the largest stocks by market cap with the Equal Weight S&P 500 (SPW) and Russell 2000 (RTY) lagging. Performance dispersion this morning partially reflects the outcome of last night’s Presidential debate and today’s Supreme Court ruling that may constrain regulatory overreach. This puts credit card companies (easier late fee rules) and managed care names (improved reimbursement rates) at or near the top of the stack.??Energy also benefits as a perceived easing in regulations helps Oil Field Service companies like BKR, SLB and HAL. Other outperforming groups include semis, capital goods, transports and homebuilders.??Solar and independent alt-energy power underperform as perceived losers in a second Trump term.??But NKE is the worst performing stock in the SPX after poor earnings and reduced guidance becomes the latest downbeat consumer data point this week (H&M, LEVI, L’Oreal and WBA).??Treasury yields are higher with curve steepening after data.??FX trends are quiet with the Dollar Index a touch lower.??Gold and WTI crude are little changed, while copper prices rebound from moving average support.

• Today’s macro data mostly supports the Goldilocks narrative with inflation edging lower, while growth-related numbers tick higher.?
• May core PCE was inline with consensus, rising +0.1% MoM for a YoY rate of +2.6%, down from +2.8% last month. Note the Fed’s median forecast for core PCE was +2.8% YoY in Q4’24, which can now be achieved with growth of roughly +0.2% MoM for the remainder of the year. The PCE report also revealed a small increase in the savings rate to +3.9%.??
• Chicago PMI increased more than +10 points to 47.4 and final June Michigan sentiment showed higher confidence/lower inflation expectations.?
• San Francisco Fed President Daly told reporters the PCE data shows that policy is working but stressed a need to stay the course.?
• The Supreme Court overturned the so-called ‘Chevron Doctrine,’ which should be considered a bullish development for equities. The Chevron Doctrine required federal courts to defer to a federal agency’s ‘reasonable interpretation’ of an ambiguous statute, which can encourage regulatory overreach in some cases.??
• Overseas data is also focused on inflation reports with European inflation expectations and France CPI ticking lower. Data out of Japan mostly supports BOJ policy tightening with an improved May industrial production number and slightly firmer core Tokyo CPI print.
• US data next week includes ISM manufacturing on Monday,?ISM services and June FOMC minutes?on Wednesday and?June Jobs Report?on Friday.

Vulnerable: Quick service restaurants were the first group to signal a loss of pricing power back in early April with other consumer-related industries (travel/leisure, auto dealers, retail, apparel) following close behind.??The warnings started a rotation out of cyclical growth stocks and into secular, defensive growth names that still have pricing power.??Mega-cap Tech stocks are part of the secular growth, while perceived AI winners should still have ample pricing power.??The rotation makes sense given late-cycle dynamics and simultaneous technology revolution.??Unfortunately, it leaves the SPX with very narrow breadth and thin leadership, which makes it more vulnerable to macro shocks and disappointments.??The largest 20 stocks by market cap now account for ~75% of the YTD gain in the SPX.??Crowding in the largest stocks by market cap is defensive behavior that typically happens at the end of the cycle.

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Chartist: The SPX keeps its bullish bias above 5375 and needs to break below 5230 to signal a potential reversal in our opinion.??Our current upside price objective is 5545, which implies upside of only +1.25%. The CBOE Volatility Index (VIX) remains supportive at subdued levels in the low double digits.??An SPX break below 5230 with a corresponding spike in the VIX above 20 would cause us to reduce equity exposure.?

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Vol: Rising equity volatility tends to follow rising bond market volatility (MOVE Index).??A lack of market liquidity can lead to increased volatility.??The US Government Liquidity Index (GVLQUSD) measures ‘yield error’ with high levels, suggesting a lack of liquidity.??The 50-day moving average of the US Government Liquidity Index is currently at its highest level in more than 20 years, signaling underlying Treasury illiquidity.?

FACT OF THE DAY

Every quarter, the IRS publishes a list of people who willfully revoke their citizenship.??At the end of Q1’23, a total of 5,315 US citizens renounced their citizenship, a sharp increase from the 2,390 who renounced in FY’22. Maybe they're charging too much?? ?

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

June 28, 2009: British astrophysicist Stephen Hawking hosts a party for time travelers, but he didn’t send out the invitations until the following day. Hawking said he hoped that copies of the invite might survive for thousands of years, and that "one day someone living in the future will find the information and use a wormhole time machine to come back to my party, proving that time travel will one day be possible.” After waiting in the room for a few hours with no visitors, Hawking went home to watch a cricket match on TV.

CATALYST CALENDAR

Next week: 1) China’s NBS PMIs Saturday; 2) French election round 1 Sunday; 3) US manufacturing ISM for June Monday; 4) Europe’s CPI for June Tuesday; 5) JOLTs report for May Tuesday; 6) US services ISM for June Wednesday; 7) FOMC minutes Wednesday; 8) UK election Thursday; 9) US jobs report for June Friday. Earning highlights: 1) Tuesday am: MSM; 2) Wednesday am: STZ

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.