May 3, 2024 | SPX Testing Near Term Resistance

MARKETS

S&P 500: Up +57 points to 5120, VIX: 13.77

Asia: Japan closed, China closed, Hong Kong +1.48%

Europe: Euro Stoxx 50 +0.58%, FTSE +0.49%, DAX +0.54%

FX: USD (DXY) down 0.35%, EUR up 0.44%, GBP up 0.15%, JPY up 0.53%, CNY up 0.20%

Energy: WTI Crude down 0.53% to $78.55, Brent down 0.36% to $83.36

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~8bp at 131bp, 5/10 yield spread +3bp

Treasuries: 2-year yields down ~8bp at 4.797%, 10-year yields down ~8bp at 4.504%, 30-year yields down ~6bp at 4.672%

WHAT WE'RE THINKING

Snapshot: US equities?are higher as bond yields decline in response to weaker labor market data.??Tech is the upside standout after AAPL’s better-than-feared earnings print and larger-than-expected stock buyback.??AAPL left its capex guidance unchanged but semis outperform as analog names continue to rerate on more indications of a Q1 trough.??Tech companies that announced big increases in capex spending like META, AMZN and MSFT are all higher this morning. AMGN is the top performing stock in the S&P 500 (SPX) after mostly inline results were overshadowed by plans to launch a phase 3 trial for Maritide in obesity.??GLP-1 leaders LLY and NVO trade slightly lower on the news, despite no details on phase 2 Maritide results and phase 1 tolerability issues.??Rate sensitive groups like regional banks, homebuilders and REITS outperform on the pullback in bond yields, while Energy retreats as an early source of funds.??Defensive groups like Staples and Health Care also underperform.??Treasury yields are lower with the 2-year now at ~4.80%.??The dip in yields results in a third day of dollar weakness as the perceived policy differential narrows. Gold is little changed, crude is slightly lower and copper ticks higher after a three day pullback.

• Lower bond yields are the result of a disappointing April Jobs Report. Non-farm payrolls came in at +175,000 vs. +235,000, the Unemployment Rate ticked up to 3.9% from 3.8% and wage growth slowed to +0.2% from +0.4% last month. On an annualized basis, wage growth slowed to +3.9% YoY from +4.1% in March and matches the slowest pace since May ’21. The downtick in wage growth is welcome news on the inflation front, but economists remain concerned about the flow through of California’s large minimum wage hike that went into effect April 1.??
• April ISM services became the latest disappointing growth datapoint with the headline number falling into contraction territory for the first time since Dec ’22. Details of the report including business activity, new orders and employment all fell, while the price component rose +5.8 points to 59.2, reversing progress made in the March report.??
• The combination of slowing payroll growth and contracting ISM services with higher prices supports the stagflation narrative that emerged last week.??
• Powell strongly hinted on Wednesday that the Fed is more concerned with downside risk to the labor market than the inflationary implications of an upside labor print. Fed rate cut expectations for ’24 tick higher to ~38bp from ~29bp yesterday and pricing of the first rate cut is pulled into September from November.??
• Aggregate overnight earnings were encouraging with upside reports also from BKNG, FIVN, MSI,??MTZ, SQ, TNDM and XPO, while shares of DKNG, EXPE, FTNT and NET trade lower.

Real yields: Last week, we called your attention to the all-time high in 10-year real yields at +228bp.??Positive real yields restrict activity with long lags that make it very difficult for the Fed to engineer a soft landing.??Real yields could go higher from here but are far more likely to pull back given the lagged effect on growth. Real yields are calculated by subtracting inflation expectations (TIPS breakeven yields) from nominal yields. Falling nominal yields or rising inflation expectations are the only ways for real yields to decline. The negative impact of restrictive real yields on growth tends to happen suddenly.??Over the last two weeks, the US Economic Surprise Index (ESI) has fallen from +41 to -7, its first negative reading in 5 months and the lowest level since February ’23. Markets will be far ahead of Fed policy with nominal yields and inflation expectations falling simultaneously, notwithstanding a supply shock.??This means real yields descend more slowly than nominal yields with the restrictive impact lasting longer than anyone wants.?

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Nominal yields: Today’s decline in bond yields is a step in the right direction, but the move thus far falls short of a change in trend.??Two-year yields are now at ~4.80% but need to fall below resistance levels near 4.75% to provide confidence is a durable reversal. Ten-year yields also make progress to ~4.50% after last week’s bullish (bond price) divergence with closing levels below 4.46% signaling a change in trend.??In our opinion, a break below 4.46% would be a logical time and place to add bond duration.?

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SPX: The SPX is flirting with resistance levels near 5129.??This is the rising simple 50-day moving average that triggered CTA selling on April 15.??We keep a tactically bearish near-term outlook on the SPX as long as it remains below this level, while sustained closing levels above 5129 (remember, it's moving) making us cautiously constructive.??The rapid decline in the US ESI is a major source of concern, but investors may choose to ‘look across the valley’ if the decline in activity is perceived to be short or shallow.

FACT OF THE DAY

The Huns had no writing system, and thus all records of them were written by their enemies - who universally described them as nearly monstrous in appearance, speech and behavior.

JSC IN THE MEDIA

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

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Adobe Plunges After Earnings:?Andrew Graham and Keith Kirkpatrick join the Watchlist to discuss the outlook for Adobe. Although there are challenges in the near-term, Adobe may benefit from the adoption of generative AI over the longer term. Watch Video

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What do Advisors see for 2024? Speaking as one of five featured advisors on Barron’s Advisor Q&A, Andrew explores why we’d see a pull-back to start the year and predicts small-cap stocks will outperform large-caps for the year. Read on Barron's

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See more of JSC in the Media.

THIS DAY IN HISTORY

May 3, 1986: Bill ‘Willie’ Shoemaker becomes the oldest jockey to win the Kentucky Derby, riding the horse Ferdinand at 54 years old. Shoemaker holds the record for most rides in the Derby with 26, including four victories. Shoemaker in 1955 aboard SWAP on way to his first Derby win.

CATALYST CALENDAR

Tomorrow: BRK/B earnings

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Sunday: China Caixin services PMI for April

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Next week: 1) Fed’s senior loan officer survey Monday; 2) RBA policy decision Tuesday; 3) China’s imports/exports for April Wednesday; 4) BOE decision Thursday; 5) ECB meeting minutes Friday; 6) Michigan confidence survey for May Friday; 7) China’s PPI/CPI for April Friday. Earnings highlights: 1) Saturday am: BRK.B; 2) Monday am: THS, TSN; 3) Monday pm: COTY, FIS, FMC, IFF, PLTR, SPG, VNO; 4) Tuesday am: ARMK, CROX, DDOG, DIS, GFS, RACE, ROK, SPR, WAT; 5) Tuesday pm: ALAB, ANET, BROS, EA, LYFT, MTCH, OXY, TOST, TWLO, WYNN; 6) Wednesday am: AFRM, EMR, FOX, SHOP, TEVA, UBER; 7) Wednesday pm: ABNB, ARM, BMBL, CART, HUBS, NTR, TTD; 8) Thursday am: H, PLNT, RBLX, SN, SOLV, TPR, USFD, VTRS, WBD; 9) Thursday pm: AKAM, G, GEN

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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