Week of June 06 2021 (Roll)

Market Wrap

Narratives

While in terms of levels the last core CPI print doesn’t reside in extreme territory, the April CPI print was nevertheless a 10-sigma event based on the last 35 years of history; yet 10s have done practically nothing. If the inflation threat had been perceived as real and 2.9% taken at face value, 10s should have repriced above 4% and perhaps even significantly higher. The deficit (between 10s at ~1.56% and where they should be) suggests rates are ignoring last month’s CPI print and on board with the Fed’s transitory narrative. Even inflation hawks agree that the most recent prints are biased by base effects and reopening dynamics, which probably accounts for the benign market reaction. There is also a sense that rates (and equities) pulled the expected inflation spike forward into the first quarter. In March, amidst fears about rising inflation, stocks with high pricing power began to outperform those with low pricing power, but during the past few weeks, low pricing power stocks have outperformed again - Aleksandar Kocic, Deutsche Bank

Week Ahead

G7 finance ministers reached a historic agreement on Saturday to reform the global tax system ahead of the highly anticipated G7 leaders' summit on 11-13 June 2021. Elsewhere, monetary policy meetings in the Eurozone, Canada and Russia will be keenly watched, as well as updated GDP figures for Japan, the Eurozone, the UK and South Africa. Other important releases include US and China inflation and foreign trade data; US and Australia consumer sentiment; Germany and India industrial output; and Japan current account.

FactSet Earnings

During the first two months of the second quarter, analysts increased earnings estimates for companies in the S&P 500 for the quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all companies in the index) increased by 5.8% (to $44.42 from $41.97) from March 31 through May 31 - FactSet

In a typical quarter, analysts usually reduce earnings estimates during the first two months of the quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.8%. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.1%. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.7%.

Q221, however, marked the largest increase in the bottom-up EPS estimate during the first two months of a quarter since FactSet began tracking this metric in 2002.

The previous record was 5.7%, which occurred in Q1 2018. However, it should be noted that analysts made substantial cuts to EPS estimates for Q2 2021 during the first half of 2020 (December 31 to June 30). During this time, the Q2 bottom-up EPS estimate declined by 19.2% (to $38.85 from $48.11). Since June 30, analysts have been steadily increasing EPS estimates for companies for Q2 2021.

At the sector level, eight sectors recorded an increase in their bottom-up EPS estimate for Q2 during the first two months of the quarter, led by the Energy (+26.3%), Materials (+12.4%), Financials (+8.9%), Communication Services (+8.6%), and Information Technology (+7.8%) sectors.

As the bottom-up EPS estimate for the index increased during the first two months of the quarter, the value of the S&P 500 also increased during this same period. From March 31 through May 31, the value of the index also increased by 5.8% (to 4204.11 from 3972.89). The second quarter marked just the sixth time in the past 20 quarters (five years) in which both the bottom-up EPS estimate for the index and the value of the index increased during the first two months of a quarter.

S&P 500 Futures

Bull vs Bear

This Week

Bulls will seek to maintain control above WHI.1, 4215, and retake the ETH ATH 4238.25 (+0.24%). A break and hold above the $GAMMA Call Wall 4246 (+0.42%), would increase the odds of a sustainable breakout from recent TRs.

Last Week

Bulls will seek to maintain control above WHI.1, 4185, and ideally quickly regain control above Friday's 4207 closing spike. The ETH ATH 4238.25 (+0.85%) and $GAMMA Call Wall 4246 (+1.04%) are both within striking range.

Bears will seek to break the $GAMMA Volatility Trigger 4191.00 (-0.88%), and ideally flip market gamma negative below 4185.00 (-1.02%) increasing the odds of a 20d MA (-1.5%) and 50d MA (-2.1%) retest.

Bears will seek to break the $GAMMA Volatility Trigger 4191.00, and ideally flip $GAMMA negative below 4167.00 (-0.84%), thereby increasing the odds of maintaining control below back to a retest of 4100 (-2.44%).

Indicators