February 12, 2024
It’s a fairly quiet session as markets await tomorrow’s January US CPI print. US equities are mostly higher with the S&P 500 (SPX) pushing further above 5000. One-year inflation expectations in today’s NY Fed consumer survey remained unchanged at 3%, while 3-year expectations declined to 2.4% from 2.6% in December. The Atlanta Fed GDPNow model increased its estimate for Q1 growth to 3.4% from an initial estimate of 3.0%. Market-based rate cut expectations for FY’24 have fallen from 125 bp of cuts to 100bp, while the Fed is penciling in 75bp.
Consensus is looking for headline CPI of +0.2% MoM or +2.9% on a YoY basis (down from +3.4% in December). Core CPI is expected to rise +0.3% MoM and 3.7% YoY (down from 3.9% last month. January CPI prints have a tendency to run hot and markets are looking for shipping disruptions to have some impact. An inline print would have bullish equity implications.
The small-cap RTY is rallying toward range resistance in the 2000-2100 area. The cyclically-sensitive index made an attempt to break above this level back in December and has spent the last ~5 weeks in consolidation mode. Our tactically bearish outlook for the RTY has been based on highly restrictive US real yields and late-cycle macro fundamentals. However, a sustained break above ~2070 would be a bullish technical signal for the index, the economy and the relative performance of cyclical stocks. The underperformance of the RTY relative to the SPX and Nasdaq 100 (NDX) has reached an all-time record, while the forward PE multiple on the RTY is at a very-rare discount to the SPX. A period of mean reversion would likely generate significant relative outperformance.
If it happens, a broadening-out of the rally may not be good news for current leaders as investors rotate into cyclical laggards. Recent outperformance in mega-cap Tech could give way to a period of relative underperformance. We prefer to use the NYSE FANG+ Index (NYFANG) to track mega-cap Tech because the Magnificent 7 has a limited history. From a technical perspective, the NYFANG would need to break below 8870 (nearly 10% below current levels) to confirm a short-term trend reversal.