- Coiled Spring Capital Macro Report
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- Coiled Spring Capital Macro Report 6/9/24
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The macroeconomic reports continue to plague the stock market, making it increasingly difficult to determine short-term trajectory. The stock market is trying to accept that we are in a goldilocks environment where inflation is subsiding, and the economy is slowing just enough to keep things from contracting. Unfortunately, the window for threading the needle continues to shrink, and the macro releases deemed too hot or too cold can take chunks out of an already choppy upward trajectory.
On Friday, the payroll number trounced estimates, sparking increased fears that the economy is struggling to decelerate. Friday’s data showed the US created 272K new jobs, while the unemployment rate increased to 4% from 3.9%, the first time a 4-handle has been seen since January ‘22. Perhaps more troubling is that hourly average earnings grew at a 4.1% yr/yr rate, up from 4% in Apr. The Fed’s target is closer to 3%.
The initial reaction in the stock market was negative, but the market reversed most of the losses to trade back positive, only to lose the bid in the last 30 minutes of trading.
The end result is that the SPX still managed to close at an all-time-high (ATH) closing price. We will repeat because it bears repeating: “ATH’s are bullish.” If the market were so concerned with the stronger payroll numbers, would we have closed where we did? We’d venture to say no, but there are other forces at play, most specifically large-cap tech weightings clouding that comment.
In our mid-week report, we discussed the NVDA split, which happened after the close of Friday. Will the enthusiasm from this split wear off, sending stocks careening lower, or will the liquidity vacuum caused by chasing NVDA find its way into lagging sectors and stocks? This is a good question, but unfortunately, we do not have a good answer.
To make this week more complicated and riskier, we will get a double dose of potential macro disruptions: the CPI will be reported on Wednesday, and the FOMC press meeting will be later that afternoon.
Will Friday’s stronger payrolls report force the FOMC to rethink its rate cut trajectory? The bond market seems to think so. The rate complex screamed higher on Friday after the release. The 2-year treasury (a good proxy for short-term interest rates) rose 16 bps on Friday, which was quite the reversal from the recent downdraft to reclaim all moving averages (MA’s). Wide-ranging candles in seemingly sleepy instruments like treasuries are notable. You’ll also notice that the yield selloff only retraced 38.2% of the advance. This is a perfectly healthy retracement; reacting strongly at key junctures is meaningful.
Adding to the confusion around the erratic macro-releases, Bloomberg Economists believes that the payroll number was weak under the surface. They think the underlying pace of job gains is likely less than 100K per month. They believe the survey overstates the labor market’s strength as it does not adjust for real-time businesses and closings. They are taking their cues from the Household Survey, which declined meaningfully.
This sets up an FOMC meeting that could go either way. Will Powell be more hawkish relative to expectations, or does he stay on the path for 2H rate cuts? While we are not economists, we do think he will continue downplaying any speculation of rate hikes and that current rates are restrictive enough. We think there is enough evidence of slowing growth to keep the rhetoric status quo. But this is our opinion, and the bond market’s reaction on Friday implies that this FOMC meeting could prove quite binary. Only one rate cut is currently being discounted in the futures market by December.
We will also get the updated dot plot from the FOMC this Wednesday. The updated dot plot will likely indicate two 25 bps cuts this year, compared to three in the March release. This should be largely anticipated.
Could this week mark the beginning of a larger drawdown scenario for the stock market, or will Powell give bulls more reason to cheer, pushing the stock market to new heights?
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