INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good. Supports "summer of small-caps"

INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps

The June Core PCE came in at +0.18% MoM. This was slightly higher than consenus but as we highlight below, there are 4 items driving this:

  • The 4 upside drivers for June PCE:
    – Professional services
    – Food services
    – Other durable goods
    – Recreational items
  • In total, this added +0.14bp sequentially to core PCE MoM. That is like the entire rise MoM vs May of +0.13%. Do these categories have a sudden surge in inflation? I don’t see how. To me, this is statistical noise.
  • The odds of 2 cuts in Sept (50bp) rose incrementally after today’s June Core PCE report. The odds are roughly 20% now. And to us, this makes sense.
  • The U Mich 1-yr inflation remained tame as well coming in at +2.9%
  • This leaves in place our view. The Fed is going to cut rates in September, starting an easing cycle. This is the “whites in the eyes” moment for small-caps IWM -0.82% . When the Fed starts cutting, the impact on sectors is as follows:
    Positive Bitcoin
    Positive Small-caps
    Positive regional banks
    Positive CRE
    Positive M&A

    Positive Cyclicals
    Negative Energy
    Negative Healthcare
  • We realize many investors are skeptical about small-caps because of their belief of a recession risk, or because of general quality bias. However, please review carefully the table data we assembled. This is very convincing to me.

BOTTOM LINE: Summer of small-cap thesis intact with IWM -0.82%  reaching $280-$300 implied

Lastly, take a look at the probabilities of a strong small-cap rally in the next 1M, 3M, 6M and 12M. If history is a precedent, the probability is 100%.

  • The “signal” is the Russell 2000 traded +/- 1% in 11 of the last 12 trading sessions. Outside of recessions/bears, this has only happened 10 times since 1979:
    – the years are: 1987, 1998, 2009 (4x), 2011, 2020 (2x)
    – these are all clear “risk-on” years and more importantly, “early cycle” years
    – yes, this signal is an early-cycle signal for IWM -0.82%
  • The forward performance from here is impressive:
    return win-ratio
    – 1M +10% 90% (win-ratio)
    – 3M +18% 100%
    – 6M +31% 100%
    – 12M +51% 100%
  • The implied prices for IWM -0.82%  are as follows:
    return implied IWM -0.82%
    – current $220
    – 1M +10% $243
    – 3M +18% $260
    – 6M +31% $288
    – 12M +51% $330
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps
Source: Fundstrat and BLS
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps
INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps

INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps

INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps

_____________________________

34 Granny Shot Ideas and 42 SMID Granny Shot Ideas: We performed our quarterly rebalance on 7/16. Full stock list here -> Click here

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INTRADAY ALERT: June Core PCE +0.18% MoM good enough for markets to raise odds of +50bp (2 cuts) in Sept = good.  Supports summer of small-caps

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