Attendance and participation are expected to stay light this week heading into the long holiday weekend. This happens every year and market trends often look entirely different when participation returns to normal on Tuesday.
The S&P 500 Value Index (SVX) began a 3-month period of consolidation in early-May when bond yields started to decline. The consolidation in the SVX was notably shallow given the relatively steep decline in yields.
After ~3 months of consolidation, the S&P 500 Value Index (SVX) is set up for a technical breakout. The S&P 500 Financials Index (easier to follow as ETF symbol IYF) has already broken out with banks trading at ~1.4x Tangible Book Value vs. their long-term
Ten-year Treasury yields closed just above technical resistance levels in the 1.28%-1.32% range yesterday. A more significant breakthrough is required before 10-year yields advance to stronger secondary resistance near ~1.45%.
As previewed, Financials (banks) outperformed on Friday and thus far today after the upside in July payrolls drove bond yields and expectations for improved Net Interest Income (NII).
Yesterday, we suggested a non-farm payroll print north of +900,000 would likely take the 10-year Treasury to 1.28%-1.30%, lead to a sell-off in the NDX and lead to a sustained rally in cyclical/value sectors, particularly banks.
Consensus expectations for tomorrow’s release of non-farm payrolls is now +862,500. Consensus for the Unemployment Rate is 5.7% (down from 5.9% in June), an unchanged average workweek at 34.7 hours and a +0.3% month-over-month increase in wages/+3.9% year-over-year (vs. +0.3% and +3.6% in June).
Today’s ADP private payroll numbers was softer than expected at +330,000. The report has a relatively weak positive correlation to official BLS data (due Friday), but today’s miss delays tapering expectations at the margin.
Friday’s release of the July Jobs report is the next near-term macro catalyst. Consensus for Non-farm payrolls is currently +825,000, which maps to a 5.7% Unemployment Rate, down from 5.9% last month.
ISM deceleration to 59.5 from 60.6 last month is relatively meaningless and partially reflects ongoing bottleneck pressures. The goods sector has been held back by what looks like a massive inventory drawdown (largest in decades) during Q2.
