April 25, 2024 | SPX Levels and Peak Inflation Fears

MARKETS

S&P 500: Down -22 points to 5050, VIX: 16.93

Asia: Japan -2.16%, China +0.27%, Hong Kong +0.48%

Europe: Euro Stoxx 50 -1.23%, FTSE +0.29%, DAX -1.18%

FX: USD (DXY) down 0.15%, EUR up 0.12%, GBP up 0.23%, JPY down 0.16%, CNY up 0.01%

Energy: WTI Crude down 0.63% to $82.32, Brent down 0.45% to $87.62

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal down ~3bp at 126bp, 5/10 yield spread -1bp

Treasuries: 2-year yields up ~7bp at 4.998%, 10-year yields up ~7bp at 4.71%, 30-year yields up ~5bp at 4.821%

WHAT WE'RE THINKING

Snapshot: US equities are lower but off worst levels after disappointing earnings and macro data.  META is the downside standout after a small top-line miss and higher capex/opex guidance to account for increased AI spend.  The relative revenue disappointment weighs on the digital advertising group (GOOGL, SNAP, PINS etc), while the capex guide adds incremental upside for AI hardware/infrastructure beneficiaries (NVDA, ANET, VRT etc).  Other semis outperform after STM in Europe became the second analog chip company (TXN yesterday) in as many days to suggest a Q1 cycle trough.  Other parts of the Tech sector come under pressure after underwhelming earnings reports from IBM and NOW.  Capital goods is a source of weakness for the Industrials sector after TXT missed on revenue and CAT lowered its Q2 sales guidance.  Transports partially recover from yesterday’s decline with better earnings prints from KEX and UNP, while most travel/leisure names benefit from earnings-related upside in AAL, RCL and WH.  Treasury yields are higher with curve flattening after data. The Dollar Index is lower despite steady weakness in yen. WTI crude is little changed, gold is higher and copper is the upside standout after BHP’s unsolicited offer to buy NGLOY adds credibility to bullish theme.  

• This morning’s macro data has a stagflation feel after Q1 GDP missed and Q1 PCE inflation came in hotter than expected.  
• Q1 GDP of +1.6% fell short of consensus for +2.2% and the final Q4 print of +3.4%.  
• Headline Q1 PCE inflation came in slightly hotter at +3.1% YoY vs. consensus for +3%, while the core rate jumped to +3.7% against a forecast of +3.4%.  
• Weekly jobless claims and continuing claims came below expectations, which reflects continued tight labor markets into next Wednesday’s Fed meeting where Chair Powell is expected to sound incrementally hawkish. 
• Total rate cut expectations for ’24 fall below 30bp with equal probability that the first cut occurs in either September or December.  
• Tomorrow’s March core PCE report is the last remaining macro catalyst on the weekly calendar not including potential macro implications from GOOGL/MSFT reports this afternoon. The 24 hours between yesterday’s post-close and today’s reports mark peak volume for the CQ1 earnings season.
• Downside overnight earnings standouts also include BMY, CMCSA, HOG, HTZ, LUV and ORLY, while shares of CMG, DOV, LRCX, MRK and TER trade higher after reporting.  In addition to GOOGL/MSFT, afternoon earnings highlights include COF, DXCM, INTC, KLAC, TMUS and WDC. 

Volatility: The benign macro environment that included lower inflation, resilient growth and promised rate cuts is now being challenged.  The benign macro environment helped to compress equity market volatility and expand forward multiples.  At ~21x forward estimates, the SPX now trades at the upper end of its long-term historical average.  Hotter inflation prints since January have led to a repricing of rate cut expectations, while today’s Q1 GDP print of +1.6% looks far less resilient than +3.4% GDP growth in Q4.  Further challenges to the benign macro outlook run the risk of spiking equity volatility and multiple compression. The CBOE Volatility Index (VIX) has pulled back from its intraday peak of ~21.4 to a more subdued measure of ~16.2.  Sustained VIX closing levels >20 will likely start to erode the valuation premium and act as a headwind for rally attempts.   

Here now: Today’s hot Q1 core PCE reading and sub-trend Q1 GDP growth would create greater downside for the SPX if the index was still short-term overbought.  We covered this earlier in the week, but the ~5.5% pullback from March 28th through Friday’s close resulted in many SPX constituents reaching short-term oversold status.  Markets usually swing from overbought to oversold and back again over the course of weeks.  The most recent move to oversold took less than three weeks and serves as a cushion until a fundamental event causes a broader technical break.

Chartist: The SPX technical break below its 50-day moving average of 5118 last Monday (4/15) triggered CTA selling.  CTAs use very simple buy/sell triggers like moving averages to add/remove equity exposure.  Prior to the event, we noted that a break below 5118 would lead to accelerated downside momentum.  CTA selling took the SPX to next level pattern/upside gap support at 4980 and a slightly lower close on Friday resulted in our current ‘tactically bearish’ outlook unless/until the index can sustain levels north of 5119.  We’re not market technicians, but use these triggers and others to ensure we don’t adopt fundamental biases.

Inflation: Yesterday’s note on the disinflationary implications from April flash PMI and record high real yields have started another branch for the decision tree. Real yields are calculated by subtracting inflation expectations from nominal bond yields.  A decline in real yields from record levels would result from lower nominal yields or higher inflation expectations.  PMI data is often the most consistent leading indicator for business activity, and the uptick in January-March CPI was in the PMI reports that preceded them by ~3 weeks.  The bond market follows official CPI data and Fed messaging more than PMI surveys. It’s too early to know if the disinflationary signal in this week’s April PMIs will translate into CPI disinflation, but a softer print on 5/15 would result in lower nominal yields, making the next few weeks a potential opportunity to add bond duration.

FACT OF THE DAY

The surname Stuart was created by Mary Stewart, Queen of Scots, to ensure that the French said her name correctly since they tend to pronounce ‘w’ like ‘v.’ 

JSC IN THE MEDIA

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 Now

The Road Ahead for the Fed: Speaking with Oliver Renick, Andrew notes there is a favorable outlook for equities as long as the macro environment remains benign. The two discuss the road ahead for the Fed, as well as how inflation is affecting markets and when to own small cap stocks. Watch Now

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 More on Barron’s

See more of JSC in the Media.

THIS DAY IN HISTORY

April 25, 1990: The crew of the U.S. space shuttle Discovery places the Hubble Space Telescope, a long-term space-based observatory, into a low orbit around Earth. At the size of a bus and free of atmospheric distortions, Hubble has a resolution 10 times that of ground-based observations. Hubble has been used to record a comet’s collision with Jupiter, direct looks at the surface of Pluto and distant galaxies.

CATALYST CALENDAR

Tomorrow: 1) US personal income/spending for March; 2) US PCE for March; 3) The final Michigan sentiment report for April; 4) Earnings before the open: ABBV, ALV, AN, AON, B, BALL, CHTR, CL, CNC, CVX, GNTX, HCA, LYB, POR, PSX, ROP, SAIA, TNET, TROW, WT, XOM

Next week: 1) Germany’s regional CPIs for April Monday; 2) China’s NBS PMIs for April Monday; 3) Eurozone CPI for April Tuesday; 4) US Employment Cost Index for Q1 Tuesday; 5) US JOLTs report for March Wednesday; 6) US manufacturing ISM for April Wednesday; 7) FOMC decision Wednesday; 8) US jobs report for April Friday; 9) US services ISM for April Friday. Earnings highlights: 1) Monday am: BEN, DPZ, ON; 2) Monday pm: NXPI, PARA, YUMC; 3) Tuesday am: ADM, AMT, APD, EAT, GEHC, GLW, ITW, KO, LLY, MCD, MMM, PYPL, SYY; 4) Tuesday pm: AMD, AMZN, MDLZ, PINS, SBUX, SMCI, SWKS; 5) Wednesday am: ADP, CG, CVS, DAY, DD, EL, KHC, MA, MAR, NCLH, PFE, YUM; 6) Wednesday pm: AIG, ALL, CHRW, CTSH, DASH, EBAY, ETSY, FSLR, INFA, MGM, QCOM, QRVO; 7) Thursday am: APO, BAX, CI, PENN, W, ZBH, ZTS; 8) Thursday pm: AAPL, AMGN, BKNG, DKNG, EXPE, FTNT, LYV, SQ; 9) Friday am: HSY, XPO

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