Inside Markets — Potential Rotation

Following last week’s 50bp rate cut, the focus shifts to growth/employment data. In line prints should alleviate fears that the Fed’s rationale for a double cut was for an ‘emergency’ and maintain the view that the economy remains on solid footing. Significant misses will bring back recession concerns while overly hot data has the potential to reprice the bond market for a less aggressive Fed. Overall, we see limited equity market downside on prints that come in below expectations given that the 50bp rate cut decisively reinstates the ‘Fed put.’ Together, the outsized cut, updated SEP and Powell press conference should lead to further steepening of the yield curve. But there are two ways a yield curve can steepen. A bullish curve steepening happens when bond yields move lower with more aggressive moves at the short end. A bearish curve steepening happens when yields move higher with less aggressive moves at the short end. For equity investors, bullish curve steepening is generally supportive for bond proxies and defensive sectors, while gentle bearish curve steepening supports the rotation into cyclical/value groups (banks, homebuilders, autos, retailers, transports ex-airlines) and small cap stocks (RTY). At this point, a potential rotation has not yet been confirmed by markets. A new cycle high in the RTY (above 2264) and coincident strength in copper prices would be confirmation.