Russell 2000 (RTY)
June 6, 2023
US equities are mostly higher with the Russell 2000 (RTY) and equal-weight S&P 500 (RSP) outperforming as the disinflation theme continues to gain traction. There has been a sharp decline in Eurozone consumer inflation expectations, while May CPI prints out of Thailand and Taiwan also undershot expectations and Japan real wages declined for a 13th straight month. However, the RBA surprised markets with a 25bp rate hike ahead of tomorrow’s Bank of Canada policy decision.
SPX: The broad participation that was present on Thursday and Friday was absent yesterday as the S&P 500 (SPX) pulled back from the August high near ~4300. Technical conditions are extremely overbought, and a breakout is a low probability event. However, a sustained break above 4310 with cyclical sector leadership would change our minds about the index retesting last year’s low near 3550.
RTY: Broad sector participation returns this morning with the Russell 2000 (RTY) outperforming on state-run media reports about expected China stimulus in the back half of the year. China reopening headlines from late December drove a ~16% month-long rally in both the Nasdaq 100 (NDX) and RTY. But the NDX is already up +34% year-to-date, while the RTY is up only 6%. And CTA positioning in the NDX vs. the Russell 2000 (RTY) is presently at historic extremes. If the SPX is going to break above 4310 with cyclical sector leadership, we’d expect outperformance from the RTY.
More: A break above 4310 would put the SPX in bull market territory as nearly every macro and market-based indicator points to an imminent recession. Manufacturing PMIs in developed economies are at levels that preceded the 2009 and 2020 recessions. And the 12-month anniversary of the 2-10 yield curve inversion occurs later this month. It’s possible that traditional models for predicting a recession are unreliable in the post-pandemic expansion, but it’s more likely just a matter of timing.