Morning Notes — Narrative

Narrative: Friday’s below consensus Nonfarm payroll print should be an incremental tailwind for the SPX as it helps keep the Fed on track to taper in 2022, rather than pulling it into 2021.  The near-term impact on bond yields is a move lower, but we expect 10-year yields to move higher in H2 in response to an improving labor market.  For now, reduced volatility in bond and equity markets should be bullish for the SPX.  The next catalyst for bond yields is this Thursday’s US May CPI number with consensus looking for headline and core CPI to come in at +0.4% month-over-month vs. +0.9% and +0.08% last month, respectively.  An in-line/lower print would create a near-term tactical opportunity for growth/Tech equity sector outperformance.  We don’t expect the outperformance would come at the expense of Financials and Energy. Sponsorship for large cap banks will likely remain high into Fed stress test results (late-June) and associated capital return announcements, while demand for Energy (refiners, in particular) should stay elevated on reopening trends.

Bond yields: Ten-year Treasury yields fell ~7.5bps to ~1.55% after Friday’s disappointing May Nonfarm payroll gain of +559,000 vs. consensus for +650,000.  That type of payroll gain is strong in an absolute sense, but disappointing in relation to expectations for two months ago.  Like last month’s disappointment, evidence suggests the reason was supply constraints with average hourly earnings picking up further and an already long workweek extending further.  Meanwhile, global May composite PMI reached an all-time high with new orders advancing further and inventories falling.  There were more signs of inflation, as well, with both the input and output measures reaching all-time records. Near-term support for 10-year yields sits at ~1.52% and continue to view ~1.45% as super-strong long-term support.  Ten year yields are consolidating after a very strong advance and we still expect bond yields to release higher like a coiled spring in the weeks/months ahead.  There’s some resistance at ~1.71% and ~1.78% before reaching our late-summer target of ~1.90-1.98%.

Value: The S&P 500 (SPX) held key support levels during the near-month long consolidation from late-April. The behavior of the SPX and other broad indices during the last month is consistent with bull-market consolidations from the past.  There’s nothing in market internals or cross market indicators to suggest the SPX is forming an imminent top.  Growth sectors continue to look relatively heavy despite the near-term reprieve in bond yields.  As noted above, an in-line/lower CPI print this Thursday could help growth and the broader SPX (heavy growth weight) outperform in the short-term, but the S&P 500 Value Index (SVX) has a much better intermediate-term momentum structure. Continue adding equity exposure in Financials, Materials, Industrials and Energy (broke out of long term pattern resistance last Wednesday) sectors.