Pro Perspectives 7/12/23





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July 12, 2023

In my note last week, we talked about the return to the danger zone for the 10-year yield (as it traded back above 4%). 
This is the level that has triggered fireworks in the global financial system over the past year (i.e. revealing vulnerabilities).  
But we also discussed a likely, impending antidote to that danger zone: A very eye-appealing inflation number was coming.
Indeed, we got it.  Not only did the headline inflation number fall to 3% (a third of the rate of a year ago), but the core, excluding food and energy, fell below 5%.  That's the lowest since late 2021.  The core monthly change, at 0.2%, was the slowest rate of change in prices in 22 months.
Just like that, we now have the 10-year yield back below 4% (at 3.86%).
This puts stocks in a very good spot…  
>Suddenly the market chatter is about "soft landing" (unapologetically abandoning the recession drum beat).
>The 10-year yield is out of the danger zone, helped by the Bank of Japan, which seems to be implicitly executing yield curve control on our bond market.  
>Second quarter GDP is projecting to be above 2%.  
>And we head into earnings this week with a market that has dialed down expectations, expecting a 7% contraction (which sets up for positive surprises).        
Meanwhile, the interest rate market continues to price in one more rate hike.  That means the Fed can raise again, as insurance against persistently hotter than long-term average inflation (which will likely come in the form of higher oil prices), with seemingly little risk to stocks.
With all of this in mind, last month we went into the inflation number looking at the longer-term charts of the big four U.S. stock indices.
Both the Nasdaq and the S&P 500 had decisively broken out of the bear market trend in Q1.  The Dow and Russell had not.  
Those big bear market trendlines have now been broken. 
Most compelling, the Russell remains down 21% from the 2021 highs.  And the index has just, last month, gone through a "reconstitution"/reshuffling of constituents. 
This looks very favorable to aggressively catch-up, particularly as the underperforming energy sector (oil) may be breaking out too. 

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