US Data In Focus
June 29, 2023
US data is back in focus after a steep drop in weekly jobless claims and big upward revision to Q1 GDP. The improved data leads to another leg higher in the US Economic Surprise Index (ESI), higher bond yields and cyclical sector outperformance. All US banks ‘passed’ the Fed’s stress test, which comes as no surprise given conservative internal deposit and lending trends. Markets are still waiting for the Fed’s updated capital and supervisory rules for banks, likely to come tomorrow.
Inflation data out of Europe was mixed with hotter German regional CPI data, while YoY headline CPI in Spain dropped below the ECB’s 2% target. Spain’s core CPI remained elevated at 5.9%. Eurozone CPI for June is due tomorrow along with US PCE for May. Monetary headlines from the ECB’s Sintra conference continue to sound hawkish as officials steer the conversation away from headline to stickier core inflation figures. Officials at the conference also emphasized their expectation that rates will remain elevated longer than what’s currently priced into markets.
US economic data continues to surprise to the upside resulting in cyclical equity outperformance and higher bond yields. Unfortunately, at some point, higher bond yields begin to undermine equity valuations. It’s been said the market can only focus on one thing at a time. We expect the time to focus on rising bond yield will be when 10-year yields rise above their March high of 4.09%. If this happens, stocks with the highest multiples will become the most vulnerable. Tech stocks have high multiples, and are most susceptible to rerating when real yields are also perceived to be rising. Real yields are calculated by subtracting inflation expectations from nominal yields. Ten year real yields currently sit at +164bps with the recent high just above us at +166bp. A break above +166bp would likely result in lower Tech multiples and underperformance from the most crowded long position among retail investors.