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The State of Markets: Rotation Underway?

 

US equities followed the classic ‘buy the rumour, sell the fact’ price pattern this week. That is, they rallied into Thursday’s inflation report (in anticipation of a ‘good’ number), and then sold off sharply on the news. That price action generated bearish key day reversals in key tech heavy indices (i.e. the S&P500 and the Philly SOX). In other words, those indices opened higher, made a new high on the CPI print, and then closed below Wednesday’s low. Often bearish key day reversals signal a near term change of trend (from bullish to bearish). 

Of interest, the inflation report was also followed by much lower rates/bond yields and, with that, sector rotation in the equity market (away from tech and towards cyclically sensitive indices, including the Nasdaq Banks and small & mid-caps). The Russell 2000, for example, closed up 3.5% on Thursday, and another 1.1% yesterday. With that it broke above its late March highs (see key chart below). 

Whether that rotation persists will be watched closely. Of note, in that respect, the US Q2 quarterly earnings season gets underway in earnest this week, with banks reporting on Monday & Tuesday (including Goldman Sachs, Bank of America, and Morgan Stanley) followed by earnings reports from Netflix & Abbott Labs (Thursday) and American Express (Friday), amongst others. Elsewhere Powell is giving an interview on Monday, there’s an ECB policy decision & press conference (Thursday); while UK inflation & jobs numbers (Wednesday & Thursday) will be watched closely. Please see below for a full list of key data and events this coming week.  

Key Chart: Russell 2000 futures shown with 50 & 200 day moving averages

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Upcoming important data/events this week:

Events:

ECB policy decision (Thurs, 1:15pm) followed by an ECB press conference hosted by Lagarde (Thurs, 1:45pm).

Monday:

Chinese new & used home prices (Jun, 2:30am); Chinese GDP (Q2, 3am).

Tuesday:

US retail sales (Jun, 1:30pm).

Wednesday:

UK headline & core CPI (Jun, 7am); US housing starts & building permits (Jun, 1:30pm).

Thursday:

UK employment, jobless claims & average earnings (May, 7am); US Conference Board leading index (Jun, 3pm).

Friday:

Japanese headline & core CPI (Jun, 12:30am).

Key earnings:

Goldman Sachs, BlackRock (Mon); UnitedHealth, Bank of America, Morgan Stanley  (Tues); J&J (Wed); TSMC, Netflix (Thurs); American Express (Fri).

 

Key Research

Longview on Friday, 12th July 2024

“US Inflation: Regime Change Underway”

 

Markets were obsessed about the stickiness of US inflation at the start of this year. That obsession was centred around service sector prices.

In particular, (i) there was no inflation elsewhere (goods has been deflationary for most of the past two years, see below); (ii) services CPI had accelerated to high levels over the prior 12 months (FIG 1); and (iii) it’s the ‘type’ of inflation that the Fed is able/willing to control (i.e. service sector price pressures are ‘domestically generated’).

Key North American macro data & events

Events:

Comments by the Fed’s Powell during an interview with David Rubenstein (Mon, 5pm); speeches by the Fed’s Daly in Q&A on the Economy (Mon, 9:35pm), Kugler at NABE conference (Tues, 7:45pm), Barkin on the Economy (Wed, 2pm), Logan at Dallas and Atlanta Fed conference (Thurs, 6:45pm), Daly in Fireside Chat (Thurs, 11:05pm), Bowman at (Fri, 12:15am), Williams on monetary policy (Fri, 3:40pm) & Bostic at Dallas and Atlanta Fed conference (Fri, 6pm); Fed publishes Beige Book (Wed, 7pm).

Monday:

US Empire manufacturing (Jul, 1:30pm).

Tuesday:

Canadian housing starts (Jun, 1:15pm); US New York Fed services business activity (Jul, 1:30pm); US retail sales (Jun, 1:30pm); US import & export prices (Jun, 1:30pm); Canadian headline & core CPI (Jun, 1:30pm); US business inventories (May, 3pm); US NAHB homebuilders index (Jul, 3pm).

Wednesday:

US housing starts & building permits (Jun, 1:30pm); US industrial & manufacturing production & capacity utilisation (Jun, 2:15pm).

Thursday:

US weekly jobless claims (1:30pm); US Philadelphia Fed business outlook (Jul, 1:30pm); US Conference Board leading index (Jun, 3pm); US total net TIC flows (May, 9pm).

Friday:

Canadian retail sales (May, 1:30pm); Canadian industrial product & raw materials price indices (Jun, 1:30pm).

Key earnings:

Goldman Sachs, BlackRock (Mon); UnitedHealth, Bank of America, Morgan Stanley, Charles Schwab, PNC Financial (Tues); J&J, Elevance Health, Prologis, CSX, U.S. Bancorp, Kinder Morgan, Crown Castle, Equifax (Wed); Netflix, Abbott Labs, Intuitive Surgical, Blackstone, Marsh McLennan, Cintas, DR Horton (Thurs); American Express, Schlumberger, Travelers (Fri).

 

Fig B: US Conference Board leading index (Y-o-Y %)

1-Jul-12-2024-02-31-54-2783-PMKey European macro data & events

Events:

ECB bank lending survey (Tues, 9am); ECB policy decision (Thurs, 1:15pm) followed by an ECB press conference hosted by Lagarde (Thurs, 1:45pm); ECB survey of professional forecasters (Fri, 9am).

Monday:

German retail sales (May, 7am); Eurozone industrial production (May, 10am).

Tuesday:

Italian headline & core CPI (June final estimate, 9am); German & Eurozone ZEW survey – expectations & current situation (Jul, 10am); Eurozone trade balance (May, 10am).

Wednesday:

Eurozone headline & core CPI (June final estimate, 10am).

Thursday:

Eurozone new car sales (Jun, 7am); Eurozone construction output (May, 10am).

Friday:

German PPI (Jun, 7am); ECB current account (May, 9am).

Key earnings:

Nordea Bank (Mon); ASML Holding, Investor (Wed); ABB, Atlas Copco, Volvo (Thurs).

 

Fig C: Eurozone industrial production (Y-o-Y %)

2-Jul-12-2024-02-34-12-5351-PMKey UK macro data & events

Events:

N/A

Monday:

Rightmove house prices (Jul, 12:01am).

Tuesday:

N/A

Wednesday:

Headline & core CPI, RPI & PPI (Jun, 7am); Land Registry house prices (May, 9:30am).

Thursday:

Employment, jobless claims & average earnings (May, 7am).

Friday:

GfK consumer confidence (Jul, 12:01am); retail sales (Jun, 7am); public sector finances (Jun, 7am).

Key earnings:

N/A

 

Fig D: UK headline & core CPI (Y-o-Y %)

3-Jul-12-2024-02-42-23-5413-PMKey Asia-Pacific macro data & events

 

Events:

Bank holiday in Japan on account of Marine Day (Mon).

Monday:

Chinese new & used home prices (Jun, 2:30am); Chinese GDP (Q2, 3am); Chinese activity data (industrial production, retail sales, fixed asset, property investment & unemployment rate – Jun, 3am).

Tuesday:

N/A

Wednesday:

Australian Westpac leading index (Jun, 1:30am).

Thursday:

Japanese imports/exports & trade balance (Jun, 12:50am).

Friday:

Japanese headline & core CPI (Jun, 12:30am); Chinese FDI (Jun, 8:10am).

Key earnings:

TSMC (Thurs).

 

Fig E: China real GDP (Q-o-Q %, annualised)

4-Jul-12-2024-02-43-31-6478-PM

Last week:

Longview on Friday, 12th July 2024:
“US Inflation: Regime Change Underway”

Longview Letter No. 145, 12th July 2024:
“US Fiscal Indebtedness: Carry on Regardless”

Monthly Global Asset Allocation No. 43, 9th July 2024:
“US Labour Market Risks Rising: Stay OW Treasuries” 

 

Prior week:

Longview on Friday, 5th July 2024:
“UK Election – And US Liquidity, How Much Is There?” 

Monthly Global Asset Allocation No. 42, 3rd July 2024:
“OIL: Uptrend Ongoing (for now)” 

Tactical Equity Asset Allocation No. 246, 2nd July 2024:
“All Eyes on Liquidity: How Much is Left?”

 

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