June 4, 2024 | Market Internals/Leadership

MARKETS

S&P 500: Down -2 points to 5282, VIX: 13.83

Asia: Japan -0.22%, China +0.41%, Hong Kong +0.22%

Europe: Euro Stoxx 50 -0.88%, FTSE -0.41%, DAX -0.95%

FX: USD (DXY) up 0.02%, EUR down 0.27%, GBP down 0.22%, JPY up 0.74%, CNY up 0.01%

Energy: WTI Crude down 1.79% to $72.89, Brent down 1.62% to $77.21

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~16bp at 136bp, 5/10 yield spread -1bp

Treasuries: 2-year yields down ~3bp at 4.775%, 10-year yields down ~4bp at 4.349%, 30-year yields down ~4bp at 4.503%

WHAT WE'RE THINKING

Snapshot: US equities are mostly lower after the S&P 500 (SPX) closed off worst levels yesterday.??Cyclical groups repeat yesterday’s underperformance with Materials and Energy sectors weakest, while bond proxies (REITS/towers) and defensive stocks (Staples) advance for a third consecutive day. Cruise ships are all higher on the pullback in crude prices, while banks, semiconductors and capital goods retreat on emerging demand concerns. Treasury yields are lower across the curve after data. The Dollar Index is little changed after breaking below its 100 and 200-day moving average yesterday.??Commodities are mostly lower with today’s global risk-off tone.??Yesterday’s ~3.5% drop in WTI crude followed an OPEC+ decision to start unwinding some voluntary output cuts after September.??

• Lower bond yields follow softer April JOLTS job openings of 8.059M, which was well below consensus for 8.360M consensus and the lowest level since 2/21. The quits rate remained unchanged for a sixth-straight month at a relatively low rate (2.2%), which often signals softening labor market conditions. Final April durable goods orders were also revised lower.?
• Tomorrow’s ISM services number and Friday’s May Jobs Report will be more important updates on the economy. ISM services are expected to improve to 50.8 from April’s surprise dip into contraction at 49.4. May non-farm payrolls are expected to narrowly beat April’s +175,000 print with consensus looking for +180,000, while average hourly earnings are expected to tick up to +0.3% for an unchanged YoY rate of +3.9%.??
• More reports discuss how auto dealers are back to offering hefty discounts.?
• Overseas developments focus on downside in India equity markets after local elections suggest a more narrow BJP (Modi) majority.??Swiss and South Korea inflation data both came in cooler than expected, while German employment data came in weaker.??
• HQY is a notable earnings-driven winner from results this morning, while shares of BBWI, DBI, GTLB and SITE trade lower after reporting.??Earnings highlights for this afternoon include results from CRWD, HPE and PVH.

Narrative: The US equity narrative may be starting to evolve with increased concern for the growth outlook.??Yesterday’s weaker-than-expected ISM manufacturing print of 48.7 vs. consensus for 49.5 helped feed the evolving narrative.??One thing to consider is that ISM manufacturing has been in contraction (below 50) since October ’22 and the US economy still managed to grow above trend in the 18 months that followed.??Dispersion indices like the ISM and PMI have lost some of their predictive power in the wake of the pandemic, but tomorrow’s ISM services print will still be closely followed.??Friday’s Jobs Report is the more important input for markets, given that the path to Fed rate cuts still runs through weakening labor market conditions.

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Bond yields: Emerging concerns around slowing growth can be seen in US bond yields.??Ten-year Treasury yields closed below 4.475% support and are now extending below the 200-day moving average at ~4.35%.??There’s very little technical ambiguity in the four-day pullback in yields as each day has closed at/near lowest levels.??Closing levels are all that really matter with a sustained break below 4.35% confirming the near-term peak of 4.61%.??The pullback in yields is not only due to softer data as the Fed’s slower QT pace also starts this month.??We’re still in the ‘bad news is good phase’ where lower yields receive a favorable equity market response, but this dynamic quickly evaporates when labor markets weaken and/or earnings estimate revisions turn negative.??Consensus is looking for May non-farm payrolls of +180,000 vs. April’s +175,000.??The number will likely need to fall below +50,000-75,000 to get a bearish equity market response.

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SPX: We’re seeing some gentle de-risking in equity markets as investors wait to see if this week’s macro data further support a slowdown/recession narrative. We’ve seen a number of false recessionary signals over the past ~18 months, which makes forecasting such an occurrence less popular.??But price action during Q1 earnings season where earnings beats were barely acknowledged and misses were severely punished makes it more important to remain on watch. The Q1 earnings season dynamic could have just been a function of buyer exhaustion, but the recent narrowing in market breadth and defensive sector leadership makes it more difficult to ignore. In addition to bond yields and data, keep an eye on liquidity conditions with the Fed’s Reverse Repo facility on the decline with a balance of just $377B as of yesterday.

From a technical perspective only, you’d need to see the SPX break below the 5060-5140 level to ‘knock out’ the April/May bullish rebound. And break below ~5000 opens the door to corrective price action down to ~4600.

FACT OF THE DAY

Sea Otters have the densest hair in the world, with up to 140,000 hair per square centimeter. Humans have about 300/cm2 on their head.

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 4th, 1838: The first officially-recoded baseball game played in North America is played in Beachville, Ontario. The game included five bases, a bat, and a yarn ball covered with calf skin.

CATALYST CALENDAR

Tomorrow: 1) ADP jobs report for May; 2) Services ISM for May; 3) Eurozone services PMI for May; 4) Eurozone PPI for April; 5) Bank of Canada rate decision; 6) Singapore’s retail sales; 7) Earnings before the open: CPB, DLTR, LE, OLLI, THO, UNFI; 8) Earnings after the close: BASE, CHPT, CXM, FIVE, GEF, LULU, SMAR, SMTC, VSCO

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Thursday: 1) ECB decision; 2) US jobless claims; 3) US trade balance for April; 3) US nonfarm productivity and unit labor costs for Q1; 4) China’s exports/imports for May; 5) German factory orders for April; 6) Earnings before the open: ABM, BIG, CIEN, KIRK, NIO, SCWX, SJM, TTC; 7) Earnings after the close: BBCP, DOCU, IOT, MTN, NAPA, NX, PL

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Friday: 1) US jobs report for May; 2) RBI decision; 3) German industrial production and imports/exports for April; 4) US wholesale trade sales/inventories for April; 5) US household net worth; 6) US consumer credit for April

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