SUMMARY: Fed speak has cooled market sentiment following a brief but intense rally. Gerard has been arguing for a potential instrument path pivot given the incoming easy disinflation (more HERE). But in terms of the Fed’s objectives for economic growth, there is no pivot imminent. Growth is slowing. Yesterday, the WEI fell from 2.81 to 2.07, and it remains in a downtrend, which is encouraging. But demand growth needs to cool to ~1% before we see a Fed objective pivot to delivering unchanged growth instead of slower growth.
Buy-side estimates for Payrolls are nearly evenly split between higher, lower, and in-line. But everyone agrees on the market reaction; a higher-than-expected reading will be risk-off, a lower reading is risk-on, and an in-line reading will cause a negligible/mixed market reaction.
Expectations were similar before the prior Payroll and CPI reports and correctly called the S&P path following those reports. Market internals were mixed with returns to risk-on/off factors inconsistent around the data release. The only commonality is volatility.
A plurality of investors expect Energy to lead through year-end. That makes some sense as Energy is the most isolated from general macro volatility and closely tracks changes in oil prices, which have moved independently of concerns about global growth. Health Care and Tech were the next two most popular choices.
Even after Energy’s extraordinary year, rising nearly 50% YTD, it has only contributed +1.2pp to the overall index return. It remains a VERY small sector. If Energy leads, it won’t be much help to equities broadly. But if Tech and Health Care gain, they would support stocks in general. John Roque thinks the uptrend for Energy is still intact. His technical scores for the constituents of the sector are in the full report.
MARKET VIEWS: Fed speak has been cooling market sentiment following a brief but intense rally this week. Mester made headlines with an aggressive rate path estimate and pushback against a pivot. Gerard has been arguing there may be a pivot soon in terms of the Fed’s rhetoric around the fed funds rate as easy disinflation (more HERE) takes hold. But in terms of the Fed’s objectives for economic growth, there is probably no pivot coming soon. Yesterday the WEI dropped from 2.81 to 2.07. The trend is lower, which is encouraging, but we need to see demand growth cool to ~1% to get comfortable with a Fed objective pivot to delivering unchanged growth instead of slower growth.
The focus is on Payrolls today. Buy-side estimates of Payrolls are about evenly split between higher, lower, and in-line. But everyone agrees on the market reaction; a higher-than-expected reading will be risk-off, a lower-than-consensus reading will be risk-on, and an in-line reading will cause a negligible/mixed market reaction.
Expectations were similar before the most recent Payroll and CPI reports and were correct in terms of the overall market reaction. S&P internals, however, were mixed. Risk-on/off factor returns around big data releases have been unpredictable. The only commonality is volatility.
Sector Leadership: A plurality of investors expect Energy to lead through year-end. That makes some sense as Energy is largely isolated from general macro concerns, closely tracking changes in oil prices, which have moved independent of concerns about global growth. Health Care and Tech were the next two most popular choices.
Energy is less than 3% of the S&P. Even after Energy’s extraordinary year, rising nearly 50% YTD, it has only contributed +1.2pp to the overall return of the index. In contrast, Tech’s -28% return has lopped off -8pp. If Energy rallies, it won’t be much help to equities broadly. But if investors are also right about Tech and Health Care, the next two most popular choices for sector leadership and the two biggest sectors, the index will be pulled higher.
Concerning Energy and per John Roque, there’s no denying the continued chutzpah and trend-strength for the S&P Energy Industry Group. However, what is perhaps its most defining, and impressive characteristic is its Relative Strength versus the S&P 500 (lower panel). As the annotation in the lower panel suggests, “if all you had was this chart you’d be loading up.”
John’s technical scores for the constituents of the Energy sector are below.
Source: Bloomberg, 22V Research
