Equities Push Higher as Bond Yields Drop
Equities started off June with gains of 1.69% on the week. They had a similar strong start in May and finished up 5% on the month. The S&P 500 and NASDAQ returned to all-time highs, while the Dow Jones Industrial Average failed to do so. Market breadth continues to be extremely weak. The NASDAQ made a rare signal by closing at a 52-week high at the same time more index members were making new 52-week lows than 52-week highs. This has historically led to notable corrections in the near-term.
NVIDIA continues to go up, which is causing huge dispersion in stock performance. Enormous flows and option activity move or pin indices such as the S&P 500. If these are pinned and NVIDIA is up every day, then other stocks must move lower. Most of the other AI related stocks had sizeable pullbacks this week.
Global Central Banks Cut Rates
Bond yields moved lower as economic data came in below expectations. This caused a rush to bonds and cracked some of the better performing AI related equities on fears of an imminent growth slowdown. The next day the data was better and all the names that sold off on Monday rallied sharply on Tuesday.
The growth scare was driven by a weak ISM Manufacturing report of 48.7. The new orders index fell from 49.1 to 45.4. However, the ISM new orders index has only been above 50 twice in the last 21 months. This has never happened in the history of the series that dates back before 1950. It never occurred in 2008-2009 or the double recessions in the early 1980s. Despite this very weak manufacturing, real GDP has averaged 2.7% over the last six quarters and exceeded the 20-year average. This may explain why the cyclical Russell 2000 has spent 600 consecutive days more than 10% below its all-time high.
Major central banks are cutting interest rates. The Bank of Canada went this week, as did the European Central Bank (ECB). They matched previous actions from the Swiss National Bank and Sweden’s central bank. The ECB cut interest rates while simultaneously raising their inflation forecast for 2025. Globally, the idea of inflation returning to target “over time” is being stretched out many years to support growth in the near-term. The bond market is currently pricing the September meeting as more likely than not the Fed begins to cut interest rates.
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Sources: BTC Capital Management, Bloomberg
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