May 28, 2024 | Incrementally Cautious

MARKETS

S&P 500: Down -9 points to 5295, VIX: 12.83

Asia: Japan -0.11%, China -0.46%, Hong Kong -0.03%

Europe: Euro Stoxx 50 -0.69%, FTSE -0.81%, DAX -0.59%

FX: USD (DXY) down 0.12%, EUR up 0.14%, GBP up 0.05%, JPY up 0.01%, CNY down 0.01%

Energy: WTI Crude up 2.30% to $79.51, Brent up 0.85% to $83.81

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal down ~3bp at 121bp, 5/10 yield spread -4bp

Treasuries: 2-year yields down ~2bp at 4.927%, 10-year yields up ~2bp at 4.487%, 30-year yields up ~4bp at 4.609%

WHAT WE'RE THINKING

Snapshot: US equities are mixed after the S&P 500 (SPX) and Nasdaq 100 (NDX) eked out a fifth-straight week of gains. Semis are an upside standout with NVDA at the top of the SPX performance table as it extends earnings-driven gains from last week. Cruise ships also outperform as NCLH and VIK benefit from bullish sell-side reports.??Health Care underperforms with MRNA the worst performing stock in the SPX after last week’s upside based on a potential avian-flu vaccine will be challenged by three large competitors that have already made H5N1 vaccines for government stockpiles.??Consumer Staples underperform on reports of increased price aggression and application software continues to look weak after a handful of underwhelming earnings prints.??Treasury yields are mixed with the curve steepening after today’s improved consumer confidence report.??Short-end yields are unchanged into today’s large 2-year Treasury auction.??Curve steepening results in gentle downside for the Dollar Index that tests support at converging 100 and 200-day moving averages.??Silver is the upside standout among precious metals, copper ticks higher after last week’s pullback and WTI advances as Russia’s seaborne crude exports drop ahead of the OPEC+ meeting.

• The Conference Board May consumer confidence index came in at 102.0, beating consensus for 95.9. Today’s better print follows three consecutive months of decline?and came with an improved view on labor markets as well as slightly higher inflation expectations.??
• The Dallas Fed Manufacturing Index fell to -19.4 with slowing business activity and higher raw materials prices adding to inflation worries in today’s data.??
• These worries are partially offset by more anecdotal evidence of price competition in QSR restaurants, auto dealers, grocery and consumer staples.?
• This morning, Minneapolis Fed President Kashkari said he wants to see "many more months" of good inflation data before a rate cut?and continued to say hikes can’t be taken off the table. This followed similar comments from Waller last week. April core PCE inflation will be released this Friday.??Eurozone CPI will also be released on Friday.??
• Today’s data out of Europe included lower ECB inflation expectations with chief economist Philip Lane basically confirming the central bank will cut rates at its upcoming 6/6 meeting.??UK retail shop price inflation also pointed to cooling prices with market-based probability for a BOE cut ticking slightly higher as well.?
• This is a fairly busy week of earnings with CRM (tomorrow) and DELL (Thursday) as the main highlights. Today’s afternoon report includes results from APPS, BOX, CAVA and HEI.

Bond yields: Ten-year yields are currently trading above near-term resistance at 4.475%.??A close above 4.48% would further dent the rate-driven bullish case for equity investors.??A break above 4.48% also puts the 10-year yield on a path to test 4.73%, which marked the beginning of the bullish equity inflection in early November.??Friday’s edition of Inside Markets discussed a potentially underappreciated election risk as the season could shine a light on debt and deficits as a result of massive increases in fiscal spending.

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SPX: Equities could potentially tolerate a slow and steady climb in 10-year yields toward 4.73%, but a quick yield backup would increase bond market volatility that can spill into equity markets.??Subdued levels of equity volatility as measured by the VIX index has driven multiple expansion since the November yield inflection.??The VIX index currently sits in a highly supportive range in the low/mid teens.??A VIX break above 20 would generate mild multiple compression that would accelerate on closing levels north off 22.?

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Under the surface: Underwhelming guidance from INTU and WDAY last week continue to weigh on application software names into CRM’s earnings report due tomorrow afternoon.??Several other software companies have recently cited challenging macro conditions and a longer sales cycle for their lack of visibility into year-end.??One theory is that massive capex spending related to AI buildouts has resulted in companies rerouting IT budgets in order to defend gross margins.? ??

FACT OF THE DAY

Red Bull was created in Thailand in 1976 as an energy drink for truck drivers.??The drink is known as Krating Daeng in Thailand, which means ‘red gaur.’??The gaur is native to Southeast Asia and looks like a big water buffalo.??

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

May 28th, 585 B.C.: A battle between the Medes and the Lydians is called off when both armies are frightened by an eclipse of the Sun. The two sides quickly negotiated a peace agreement, ending their six-year war. The battle, known as the ‘Battle of the Eclipse’ was fought in Anatolia (present-day Turkey).

CATALYST CALENDAR

Tomorrow: 1) German regional CPIs for May; 2) Eurozone M3 money supply for April; 3) Richmond Fed manufacturing index for May; 4) Dallas Fed services survey for May; 5) The Fed’s Beige Book; 6) Earnings before the open: AAP, ANF, CHWY, DKS; 7) Earnings after the close: A, AEO, AI, CRM, HPQ, NCNO, NTNX, OKTA, PATH, PSTG, SSYS

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Thursday: 1) Eurozone unemployment rate for April; 2) US Q1 GDP/PCE revisions; 3) US advance goods trade balance for April; 4) US weekly claims; 5) US wholesale/retail inventories for April; 6) US pending home sales for April; 7) South Korea industrial production for April; 8) Japan’s Tokyo CPI for May; 9) Japan’s unemployment rate, industrial production and retail sales for April; 10) China’s NBS PMIs for May; 11) Earnings before the open: BBW, BBY, BIRK, BURL, CAL, CBRL, DG, FL, HRL, KSS, SPTN 12) Earnings after the close: COO, COST, DELL, GPS, ESTC, HCP, IBTA, JWN, MDB, MRVL, NTAP, PD, S, ULTA, VEEV, ZS

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Friday: 1) US personal income/spending for April; 2) US PCE for April; 3) Eurozone CPI for May; 4) Taiwan’s Q1 GDP; 5) Hong Kong’s retail sales for April; 6) Chicago PMI for May

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.