Inside Markets — Testing New Highs

The SPX and NDX are threatening new highs as bond yields break below moving average support. Ten year bond yields have pulled back more than 30bp over the last four days to close below its 200-day moving average yesterday. The move was triggered by the recent string of weaker growth data starting with Q1 GDP revisions, PCE consumer spending, ISM manufacturing and yesterday’s JOLTS report. The combined data suggests weakening Q2 consumption trends at best and possibly contraction.

Today’s stronger-than-expected services ISM print adds some credibility to the idea that economic growth is simply normalizing rather than contracting. The last two weeks of disappointing growth data amid indications of elevated inflation had begun to shift the equity market narrative more toward a ‘bad news is bad’ phase. The relatively rapid deterioration in the growth outlook resulted in lower bond yields and lower stock prices as the focus shifted away from easing financial conditions to weaker growth. The reacceleration in ISM services will pause emerging recession concerns and temporarily reinstate the Goldilocks scenario – at least until Friday’s Jobs Report.

Inflation pressures should moderate on a sequential basis as we go through the year, but base effects will likely keep YoY core PCE uncomfortably above the Fed’s target through November. The Fed could ease on sequential improvement, but we continue to see the near-term path to Fed rate cuts running through weakening labor market conditions, which would have bearish implications for equity markets. May payroll gains that fall below ~75,000 could encourage rate cuts but also generate downside in the SPX. An inline payroll number (+150,000 to +200,000) and lower wage growth (below +0.3% MoM) is the bullish outcome for equities. Encouragingly, today’s ADP report showed pay growth for job changers fell for a second-straight month, while pay growth for job stayers remained unchanged at 5% (lowest reading since 8/21).

A SPX close above the all-time high of 5321 would make the percentage based swing objective of 5415 first level resistance.