What happened last week
- Price Action: Small-caps continued to outperform year-to-date leaders, like the tech-heavy NASDAQ 100.
- U.S. Data: U.S. GDP came in stronger than expected, as did business sentiment surveys of purchasing managers (PMIs).
- Rates: Downside momentum in U.S. Treasury yields was supported by rate cuts from the Chinese central bank and the Bank of Canada.
What we’re watching this week
- Earnings: This is the week—40% of the S&P 500 and 45% of the NASDAQ 100 are reporting (MSFT, META, AMZN, AAPL).
- Data: Friday’s non-farm jobs report is very important for growth sentiment; JOLTS and Consumer Confidence add to the mosaic.
- Policy: Wednesday’s Fed meeting, a potential hike from the Bank of Japan, and the quarterly refunding announcement may influence U.S. and global yields.
Horizon’s Investment Management Views
The volatile rotation of investor positioning continues; small caps posted gains for the third straight week while the mega-cap tech-heavy NASDAQ 100 declined. The June CPI report, which kicked this off two and a half weeks ago, all but locked the Fed into a rate cut in September. Since that release, small-caps have rallied over 10% while the NASDAQ 100 has declined almost 8%, dragging the top-heavy S&P 500 down about 3%. Earnings added to last week’s volatility as the first two names of the Mag-7 to report failed to meet the market’s high bar. Our sense is we are getting closer to the end of this positioning adjustment and the resulting sell-off in the S&P 500, but we will need to see some good reports from the ~40% of the market cap that reports this week to be able to signal the all clear.
The bond market shared in the volatility last week as investors struggled to handicap growing calls for a July cut by the Fed against a stronger 2Q GDP report and better U.S. PMI data. Rate cuts by the Chinese central bank and the Bank of Canada added to the downside momentum for U.S. yields as expectations built for almost three rate cuts in 2024. We think this move lower in rates, especially in the front end, is starting to look extended. Notable to us, long-term yields are not making new lows as the front-end dives, perhaps reflecting growing uncertainty around the U.S. election. Meanwhile, the Fed will try to generate as few headlines as possible while preparing the market for a September cut.
This week is the biggest of the summer for markets—fewer than half of U.S. large-caps report, including Microsoft, Meta, Amazon, and Apple. Switching to the macro, Wednesday’s Fed meeting is important as a potential hike from the Bank of Japan, which may determine the direction of the yen carry trade, another popular position that has come under pressure in the last few weeks. We also get June payroll figures and the Treasury’s quarterly refunding announcement, which has, in recent history, set the direction of Treasury yields over subsequent months.
The JOLTS report or Job Openings and Labor Turnover Survey is a report from the Bureau of Labor Statistics measuring employment, layoffs, job openings, and quits in the United States economy.
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