September 9, 2024 | Yield Curve

MARKETS

S&P 500: Up +61 points to 5470, VIX: 19.85

Asia: Japan -0.48%, China -1.06%, Hong Kong -1.42%

Europe: Euro Stoxx 50 +0.86%, FTSE +1.09%, DAX +0.77%

FX: USD (DXY) up 0.36%, EUR down 0.33%, GBP down 0.28%, JPY down 0.39%, CNY down 0.23%

Energy: WTI Crude up 1.17% to $68.48, Brent up 0.77% to $71.60

Cross markets: Terminal rate unch at 5.20, Implied rate cuts 2-years from terminal up ~13bp at 242bp, 5/10 yield spread +21bp

Treasuries: 2-year yields up ~3bp at 3.673%, 10-year yields unch at 3.71%, 30-year yields down ~1bp at 4.00%

WHAT WE'RE THINKING

Snapshot: US equities are broadly higher after the S&P 500 (SPX) finished last week down -4.25%.  Curve steepening trades outperform with banks and asset managers leading, while defense groups lag.  Semis rebound after the Philadelphia Semiconductor Index (SOX) fell more than -12% last week.  Shares of SMCI also recover to sit on top of the SPX leaderboard with AI beneficiaries higher into today’s iPhone event.  MRNA is close behind into its R&D day later this week, while DELL and PLTR get a lift from their announced entry into the SPX.  GOOGL is lower into the start of the company’s second antitrust lawsuit, while managed care stocks retreat with HUM, CVS and UNH as downside standouts.  Treasury yields are narrowly mixed after the 2/10 spread reached +5bp on Friday.  The Dollar Index is higher.  Gold is up a touch, copper is higher and WTI crude gains ~1.8% after last week’s ~8% pullback to $68bbl.

• Market internals suggest today’s rebound in equities is linked to anticipation of monetary policy support into Thursday’s ECB meeting and next Wednesday’s FOMC.  
• Friday’s August payroll miss and July’s downside revision drove increased growth concerns.  
• Former NY Fed President Bill Dudley believes the Fed has fallen further behind the curve and worries that even a more aggressive Fed action may not be enough at this point to stave off recession.  That view isn’t shared by current Fed members Williams and Waller who on Friday reflected support for a 25bp cut arguing that labor markets are cooling rather than deteriorating. 
• Today’s data is mostly focused on inflation with the August Manheim used car index ticking higher (+1.2% MoM) for a second straight month.  The NY Fed Survey of Consumer Expectations showed one and five-year inflation expectations remained unchanged with three-year expectations rebounding somewhat after falling last month.  
• Wednesday brings August CPI with consensus looking for headline inflation of +0.2% MoM and +3.2% YoY.  The Fed is currently more focused on labor markets but the CPI print could inform the committee's decision over the size of the September rate cut/pace of easing.  
• Friday’s update from INVH suggested the pace of rental disinflation has started to intensify.  
• Treasury supply is also in focus this week with auctions totaling $148B. 
• China August CPI inflation came in cooler-than-expected, while PPI deflation worsened causing increased growth concerns.  China’s August trade data will be released this evening.  
• AAPL’s iPhone launch this morning and ORCL earnings this afternoon are today’s corporate/AI-linked highlights. Other earnings reports this afternoon include CVGW and RBRK.  Sell-side conference season ramps this week with potential updates from Health Care, Financial Services and Tech companies.

Curve: The yield curve steepening that’s occurred over the last two months has mostly been driven by lower short-end rates.  Longer-dated yields have also declined but by a lesser degree. This type of curve steepening does NOT deliver cyclical sector outperformance.  Sharply lower short-end yields and slightly lower long-term yields are a disinflationary signal and potential recession warning with defensive sectors as primary beneficiaries. This explains some of the recent outperformance in Utilities, Telcos, Staples and REITS.  We expect more near-term outperformance from these groups with the addition of Health Care that has thus far lagged.  Pure cyclical beneficiaries like Energy, Materials (mining and chemicals) have underperformed along with cyclical consumer areas like autos, airlines and travel/leisure.  Cyclical groups outperform when the curve steepening is driven by lower short-end yields and static/rising longer-dated yields.  Again, that is NOT the case at the moment.  Small-cap stocks usually benefit from this latter form of curve steepening, but we think they have a chance to outperform on a relative basis in the current environment.  This is because small-cap stocks have been disproportionately punished by the rising cost of capital over the last 2 years. 

FACT OF THE DAY

A 2015 YouGov survey showed that only 59% of U.S. adults knew humans and dinosaurs didn’t coexist.

JSC IN THE MEDIA

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</> 

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

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 9, 1839: English scientist and astronomer John Herschel takes the first glass plate photograph.

CATALYST CALENDAR

Tomorrow: 1) UK jobs report for July; 2) Harris/Trump debate; 3) Earnings before the open: ASO; 4) Earnings after the close: GME, PLAY, WOOF

Wednesday: 1) US CPI for August; 2) UK industrial/manufacturing production for July; 3) Japan’s PPI for August; 4) Earnings before the open: DBI; 5) Earnings after the close OXM

Thursday: 1) ECB rate decision; 2) US PPI for August; 3) US weekly jobless claims; 4) US household net worth for Q2; 5) Earnings before the open: CAL, KR, SIG; 6) Earnings after the close: ADBE

Friday: 1) Japan’s industrial production for July; 2) Eurozone industrial production for July; 3) US import/export prices for August; 4) The final Michigan sentiment report for September; 5) China’s industrial production/retail sales for August

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.