An “Everything Rally” to Kick Off the Week

Markets rally ahead of an action-packed week in the U.S.

Highlights

• Markets rally ahead of an action-packed week in the U.S.

• Stocks have priced in a Goldilocks economy scenario

• Less than meets the eye to Q2 GDP

• Due diligence in the passive investing era is more important than ever

While We Were Sleeping

It’s an “everything rally” to kick off this action-packed week. U.S. futures are well into the green across the board. While European markets are flat for the most part, they have been building positive momentum through the morning. Asia rocked and rolled for a change, with widespread advances across Japan’s Nikkei 225 (+2.1%), Hong Kong (+1.3%), Korea (+1.2%), Singapore (+0.5%) and Taiwan (+0.2%). The Shanghai Composite was flat even though Chinese industrial profit growth in June accelerated to +3.6% on a YoY basis from +0.7% in May. Bonds are rallying too — by -5 basis points for 10-year gilt yields to 4.04% in the U.K., by -4 basis points for JGBs to 1.01%, and by -3 basis points across Europe (to 2.37% for 10-year German bunds) and the U.S. as well (10-year T-note down to 4.165%).

Perhaps Alan Blinder’s op-ed piece on page A17 of today’s WSJ is resonating — The Fed Should Cut Interest Rates This Week. The Fed won’t, but it probably should — understandably, the economy is far from collapsing but is holding together principally by a relentless drawdown in the personal savings rate, and the overriding point is that a real Fed funds rate of 2.8% is one that typically is in place for an economy that is overheating (+130 basis points above the long-run norm) which is definitely not the case (all major definitions of the Taylor Rule suggest the nominal policy rate should be closer to 4.0% than 5.4% right now). In the twelve months to June, there has been absolutely no growth in real (volume) M2 or bank credit growth. These are yellow flags for the economy, notwithstanding the glow from the various government economic data releases (like GDP and nonfarm payrolls).

The DXY dollar index has popped +18 pips to 104.5 — back above its 200-day moving average (even as dollar-yen slipped -0.5% to ¥153 and is on course for a -5% slide for all of July… a possible BoJ rate hike this week is at play). And even with the bid to the greenback, we see on our screens that Bitcoin (+2.3% to a six-week high of $69,568 on the back of the “never sell your Bitcoin” refrain out of Donald Trump over the weekend), Brent crude (+0.2% to $81.30 per barrel — escalating Mideast concerns at play; interesting that all the political types are fretting over a future “escalation” when Hezbollah is the entity that has already caused the “escalation” that everyone is so worried about happening… it’s happened) and gold (eking out a +0.1% gain to $2,390 per ounce) are all up so far today. Copper has steadied at $9,121 per ton, but iron ore has dropped an additional -0.4% to $101.8 per ton after notching a third straight weekly decline (all market quotes time-stamped to 4:30 a.m. ET).

This is a pivotal week, to say the least.

The data calendar is jammed: June JOLTS data tomorrow along with the Conference Board’s consumer confidence data for July; ADP employment for July on Wednesday along with the second-quarter Employment Cost Index, June pending home sales, and of course the FOMC meeting. Thursday brings Q2 productivity and unit labor costs, the ISM manufacturing PMI for July, and then we round out the week with the July employment data on Friday.

It is also action-packed beyond the U.S. — we have the BoJ policy meeting tomorrow night, where a QT announcement is probable, and an actual rate hike having a 70% chance per market pricing. The BoE holds its meeting on Thursday, and that could very well bring with it a rate cut. China releases its July PMI data tomorrow night as well, frequently a market-mover. Wednesday brings with it Canadian monthly GDP numbers for May.

And, of course, it is a major week for mega-cap Tech earnings: Microsoft, Amazon, Apple, and Meta will be critical tests for these titans, whose valuations are all stretched in a major way.

Through the first half of the year, it was all about large-cap Tech, with mostly everything else in the stock market left in the dust. Ever since the CPI report nearly three weeks ago and the more dovish musings out of the Fed, as well as signs from much of the data that the recession has not yet arrived, we have seen a switch of epic proportions. For three weeks running, the S&P 500 equal-weight index has beaten the cap-weighted barometer. Since the CPI report, the Russell 2000 has surged +10% while the Nasdaq 100 has retreated -8% in this “Great Rotation.”