Bottom Line: Investors are assuming a decline in inflation and 3-4 rate cuts. 10yr yields are assumed to be higher on better economic growth prospects. That would change (i.e. inflation driving 10yr yields) if 1) wages remain sticky at too high of a level and 2) January effects are proven to not be the main driver of last month’s CPI increase.
Relevant News: S&P PMI better than expected (51.5 expected 52.5 actual) while the ISM was weaker than expected (47.8 actual 49.5 expected). The goods economy is rebounding as the internal data we get with the official ISM would suggest. The bond market seems to agree. Consumer spending needs to slow some, or total economic growth will likely remain too hot. If wage growth moves lower, we can reasonably expect slower consumer spending.
Things to Watch [Consensus, Results]:
Economics: PCE update
Real PCE was down -0.1% in January, in line with the screen consensus and fairly close to what 22V’s economist had modeled (-0.2%) post retail sales. The ex-auto figure was flat which was inline with his modeled guess. If we were to get 2% (ar) sequential growth in February and March and no further revisions, then Q1 growth rate would print at 2.2%, which is just marginally above trend. A purely backward-looking analysis of real PCE growth would suggest a trend rate of 2.5% or slightly above. How the data evolves will shift market pricing of Fed rate cut expectations.
Source: BEA, NBER, FH calculations including chaining
Data are actual to January.
Portfolio Strategy: Investor Survey on 10yr Yields
67% of the investors we surveyed think 10yr yields will end March higher. That percentage drops to 50% for the end of June. The median expectation for the 10yr yield at the end of March is 4.35%, and the median for the end of June is 4.17%.
72% of investors think why the 10yr yield increases matters for small cap relative performance. Our view is if economic growth is pushing up 10yr yields, but not inflation, small caps will perform well, despite their interest rate sensitivity. A lot more on that HERE.
Technical Analysis & Portfolio Strategy: Potential Energy Catch
Cyclicals are significantly outperforming Defensives, but one Cyclical that has lagged is Energy. In a normal economic expansion, which we are in now, you should expect all Cyclicals to benefit over time. Energy has been a Cyclical laggard, and some catch should be expected.
22V’s technical analyst highlights the top 28 Energy stocks within the S&P 1500 Energy sector below(S&P 500 + S&P 400 + S&P 600). According to him, “within this list (39% of the S&P 1500 Energy Sector), please notice the 5 stocks that are benefitting from a pickup in their Scores: OVV, AM, DTM, SM, and CNX. Without engaging in hyperbole, these 5 are in good buy / add spots.” The rest of the list shows the energy stocks with positive Technical scores.
Source: Bloomberg, 22V Research
