September 19, 2024 | Rate Cycle Favors RTY Outperformance

MARKETS

S&P 500: Up +96 points to 5715, VIX: 16.48

Asia: Japan +2.13%, China +0.69%, Hong Kong +2%

Europe: Euro Stoxx 50 +1.91%, FTSE +0.70%, DAX +1.33%

FX: USD (DXY) up 0.25%, EUR up 0.19%, GBP up 0.41%, JPY down 0.36%, CNY up 0.12%

Energy: WTI Crude up 1.35% to $71.87, Brent up 1.40% to $74.68

Cross markets: Terminal rate down ~5bp at 5.13, Implied rate cuts 2-years from terminal down ~8bp at 228bp, 2/10 yield spread +14bp

Treasuries: 2-year yields down ~2bp at 3.596%, 10-year yields up ~3bp at 3.73%, 30-year yields up ~5bp at 4.066%

WHAT WE'RE THINKING

Snapshot: US equities?are higher as part of a global risk-on trade induced by yesterday’s Fed rate cut.??The Nasdaq 100 (NDX) and Russell 2000 (RTY) are outperforming, which usually happens in first 1-3 months of an easing cycle.??This puts Tech and Comm Services at the top of the sector leaderboard, while defensive groups like Utilities and Staples retreat.??Cyclical laggards also make the winners list with DRI as the best performing stock in the S&P 500 after missing on EPS, reiterating FY guidance and noting improvement foot traffic.??Autos outperform with TSLA the second best performing SPX stock, while shares of PGNY are under pressure after disclosing the loss of a significant client.??Health Care mostly lags with distributors and managed care weakest, while tools/diagnostics stocks rally after the Fed rate cut creates room for China stimulus.??Treasury yields are mixed with curve steepening as the 2/10 spread widens to +14bp.??The dollar is lagging against major crosses, particularly vs. the Aussie dollar after strong jobs numbers ?reduced chances for a RBA rate cut.??Sterling is another upside standout after the BOE left rates unchanged and signaled a gradual approach to easing.??Gold is up +1.25% as it recouples with real yields that decline in the wake of yesterday’s policy decision.??Copper advances for a seventh straight session and WTI crude gains +2% to $72bbl.

• Strong gains catalyzed by yesterday’s rate cut get help from a lower weekly jobless claims figure that eases some concerns after labor markets weakening further.??
• The Philadelphia Fed manufacturing survey for September improved on a MoM basis but missed consensus with the new orders component falling 16 points to -1.5. The employment component improved and firms continued to report increased prices.??
• August existing home sales also missed consensus and fell -2.5% MoM.??
• Other central bank decisions included no policy changes in Norway, a rate hike from Brazil and a rate cut from South Africa.??
• The BOJ meets tonight and is expected to stay on hold – for now.??The ECB’s Centeno said the central bank may need to accelerate the pace of easing, while the Swiss government cut its inflation forecast, opening the door for the SNB to cut rates next week. ?
• China is expected to trim its Loan Prime Rate (LPR) tonight with the Fed rate cut giving the PBOC more flexibility to ease. Reports also suggest increased scope for more fiscal stimulus measures out of Beijing.? ?

Yesterday: The Fed policy statement indicated that 50bp rate cut was motivated by improving inflation and evolving risks to employment and inflation. The median dot in the updated SEP suggests an additional 50bp of easing this year (25bp in Nov and Dec) and 100bp next year, which would take the upper bound of Fed funds to 3.5% - still well above neutral (R-star), which was upwardly revised to 2.875%.? ?Yesterday’s post-press conference pullback was attributed to a higher estimate of R-star and Powell’s assertion that the 50bp cut was not a reaction to recession risks. In fact, he mentioned multiple times that the US economy is strong and the labor market is simply cooling from overheated levels. This caused bond yields to rise off session lows and generated a sell-the-news response following last week’s ~4% rally in the SPX. Despite the immediate negative reaction to Powell’s press conference, the Fed’s policy message, updated dot plot and macro data just add support to the Goldilocks narrative that should be positive for earnings growth.?

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History: Over the past 40 years, the Fed has cut rates 12 times when the SPX was within 1% of its all-time high.??In every occurrence the SPX was higher 12 months later with an average return of ~15%.??In the first month, the NDX outperformed the SPX but underperformed on a 3-month basis.??Interestingly, the Russell 2000 (RTY) outperformed the SPX on a 1-month and 3-month basis.?

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RTY: The RTY catch up trade is the most compelling opportunity in this market.??After two years of extremely positive real yields and large cap dominance, the RTY finds itself nearly 40 percentage points behind the SPX in terms of performance.??We began writing about the RTY catch up trade after the index broke above the upper bound of its two-year trading range in July.??At the time, we questioned the sustainability of the move given falling copper prices.??The RTY is a cyclically-sensitive index and the breakouts required cross market confirmation from something cyclical – like copper.??The move higher in the RTY only has legs if copper prices are rising in lockstep.??Copper prices are off August lows near $398 and now rising at $435 with a break above ~$440 confirming a near-term bullish trend.? ?The RTY is now at 2253 with a sustained close above ~2265 confirming its near-term bullish trend.??

FACT OF THE DAY

Gouda accounts for over half of the world’s cheese consumption.??

JSC IN THE MEDIA

NVDA & AMD AMD to Keep "Fatigued" Chip Trade Moving: Andrew Graham and Kim Forrest appear on Trading 360 to discuss the outlook for semiconductor stocks. Watch on Schwab Network

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Stocks tumble as September starts, investors cool on chips: Reuters compiled advisor perspectives heading into the historically weak month of September.??Andrew is featured offering perspective on NVDA and other AI beneficiaries that may be entering a natural period of disillusionment. Read More

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Fed more likely to cut 25bps: Andrew joins ‘Fast Money’ to talk signs of economic slowing, what to expect from the FOMC moving forward, and more. Watch on CNBC

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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

See more of JSC in the Media.

THIS DAY IN HISTORY

September 19, 1991: German tourists discover a mummified human body in the ?tztal Alps on the Italian-Austrian border. The body, later known as ?tzi the Iceman, was determined to date from ~3300 BC.

CATALYST CALENDAR

Tomorrow: 1) China April Industrial Production, retail sales, Fixed Asset Investment and jobless rate; 2) India imports/exports for April; 3) Germany’s Q1 GDP; 4) Eurozone Q1 GDP; 4) Eurozone trade balance for March; 5) US retail sales for April; 6) US Empire Manufacturing Index for May; 7) US Industrial Production for April; 8) US Michigan Confidence for May and; 9) earnings before the open from DKNG, JD and VFC.

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Next week: 1) Flash PMIs for September Monday; 2) RBA rate decision Tuesday; 3) Riksbank decision Wednesday; 4) SNB decision Thursday; 5) Tokyo CPI for September Thursday; 6) CPIs from France and Spain Friday; 7) US PCE for August Friday. Earnings highlights: 1) Tuesday am: AZO; 2) Wednesday pm: MU; 3) Thursday am: ACN, JBL, KMX; 4) Thursday pm: COST, MTN

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.