Inside Markets — Better Growth Data

The primary driver this morning is US economic data that is better than expected. May durable goods orders posted an upside surprise for a third straight monthly increase. June consumer confidence came in above consensus as well as May new home sales that increased at their fastest pace in 15 months. May PCE on Friday is still expected to be the highlight of the week. Meanwhile, ECB President Lagarde said Eurozone inflation is too high, and rates need to be sufficiently restrictive for as long as necessary and China Premier Li said the economy remains on track for 5% annual GDP growth with expectations for Q2 to be better than Q1. Li’s comments drove some increased hopes for further stimulus. The PBOC also set its daily yuan reference at a stronger-than-expected level after closing at its weakest level in seven months.

The S&P 500 (SPX) closed at lows yesterday led by Tech, while the equal-weight S&P 500 (RSP) posted gains.  Cyclical sectors led and market depth improved with 69% of the index closing higher on the day. We’re seeing a similar trend this morning after improved data pushes cyclical sectors to the top of the list.  Unfortunately, a cyclical recovery from here also requires inflation to break lower with Friday’s May PCE next on the calendar.  But this is the third inflation report for May following CPI and PPI earlier this month, and the report is, at least, partially de-risked.  The real test for inflation will be the June CPI report due on Wednesday July 12.

The SPX remains technically overbought despite a -2.2% pullback over the last six sessions.  While the consolidation phase seems incomplete, the index keeps its bullish momentum above 4195 into technical resistance near 4530.  Overall, we continue to view gains above ~4200 as part of a position squeeze that began in late May after better growth data forced PMs to close out cyclical underweights.