Morning Notes — Near-Term Roadmap

Tomorrow: PMI is a forward-looking diffusion index with levels above 50 implying expansion and levels below implying economic contraction.  The distance on either side of 50 is a measure of velocity. PMI is the best forward-looking (3-6 months) indication of future economic growth, and tomorrow’s release of Eurozone services PMI has the potential for an upside surprise. Disappointing manufacturing PMI from the US or Eurozone has the potential to pressure bond yields lower in the near-term, leading to more near-term outperformance in growth/Tech as the group lifts from short-term oversold levels.  It could be a punchy rally, but expect growth/Tech multiples to remain confined as long as 10-year bond yields stay north of ~1.45% and expect the same multiples to come under renewed pressure once yields release through ~1.69%.

Next Friday: An above consensus core CPI print next Friday also has the potential to move yields through ~1.69%.  But cyclical/value outperformance is more highly correlated with yield curve steepening than nominal 10-year yields.  So this makes jobs data and associated Fed tapering a more important catalyst for the group than supply constrained inflation spikes.

Cyclical/value: Expect labor conditions to tighten over the next 2-3 months with a more deliberate tapering conversation taking 10-year yields to the 1.90%-1.98% range.  Also expect 5-year/30-year curve steepening leading to a resumption in cyclical/value equity leadership.  In the meantime, it will be important to follow other positively correlated indicators like the Copper/Gold ratio and Value/Growth ratio.  Use sector weakness to identify relatively strong names in Financials, Materials, Energy and parts of Consumer Discretionary (retail and autos).