For most of the session yesterday, the S&P 500 was having trouble choosing a direction, but come the final hours of trading with a CPI release looming, the index took a decisive turn lower. Given rampant hot inflation over the past couple of years and its implications for changes to monetary policy, that sort of late day selling ahead of CPI prints has been the norm as shown below.  On average for the past two years, the day before CPI releases has typically seen the S&P 500 trade higher for most of the session before turning lower and erasing its gains in the afternoon; just as we saw yesterday.

With another hotter than expected print this morning for both headline and core measures of inflation, yesterday’s late day sellers seem to have been on the right side of the trade as the S&P 500 has fallen further and is on pace for the sixth drop on a CPI print in a row. Taking a look at intraday price action of the S&P 500 on CPI release days, historically there has been a downward bias with all releases since 2000 averaging a drop of a few basis points by the close.  Over the past two years it has been far worse with an average decline of 28 bps.  Most of that drop has actually occurred after a bout of midday selling.

Using data from our Economic Indicator Database, filtering out for only times in which CPI has come in above expectations (on a month over month basis), that same pattern is apparent.  The S&P 500 tends to trade in the red for most of the morning but the worst declines occur in the early afternoon before some stabilizing into the close.

In response to today’s hotter than anticipated release, the S&P 500 gapped down 1.2% which ranks as the fourth worst gap down for the index on a CPI day since at least 2000.  Going back over the past two decades, there have only been a total of seven gaps down of 1% or more on a CPI day.  Including today, four of those releases have occurred this year: February (-1.2%), March (-1%), June (-1.64%), and today (-1.23%).  Taking a look at the intraday pattern of the S&P 500 across those 1% or larger gaps, the index has tended to continue to fall throughout the session with the lows of the day tending to occur around 2:30 EST with modest sideways action into the close from there.  Click here to learn more about Bespoke’s premium stock market research service.

With inflation running out of control and markets furiously attempting to re-price Federal Reserve interest rate policy, we’re seeing some truly wild moves in the fixed income markets.  This week, the big moves have come at the short-end of the Treasury yield curve as three-month Treasury yields have surged by 35 basis points this week alone.  While the 2y10y US Treasury yield curve has been inverted for seven trading days now, the 3m10y curve, which is the FOMC’s preferred measure of the yield curve, has remained positively sloped, but the rate of flattening has really picked up in recent days and since early May has gone from around 225 bps to under 75 bps today. Click here to learn more about Bespoke’s premium stock market research service.

As mentioned above, the bulk of the flattening in the 3m10y curve has occurred more recently.  The chart below shows the 20-day rate of change in the 3m10y US Treasury yield curve since 1962.  The red line indicates the threshold for 100 bps of flattening in a four-week span which is where we are at now.  Prior to the current period, there wasn’t a similar flattening of the 3m10y curve in a four-week span since the Financial Crisis. In August 2011, the rate of flattening got close to 100 bps in a four-week span but came up just shy. In other words, these types of moves in the yield curve don’t happen very often.

How often are they? The chart below shows the distribution of four-week changes in the 3m10y yield curve over time grouped into 20 bps increments.  Including the last few days, where we are at in the current period  (-100 to -120 bps of flattening in a four-week span) has only occurred on 77 trading days, and there have only been a total of 223 trading days where the yield curve flattened by 100 bps or more in a four-week period.  On a percentage basis, that works out to less than 1.5% of all trading days. When it comes to markets, it seems as though there’s always something unique happening out there, and these days, you don’t see what’s happening at the short end of the Treasury curve very often.

The only US release on the economic calendar today was the NFIB’s Small Business Optimism Index, and it was a big dud.  Compared to last month’s low reading of 93.1, the index fell to 89.5 versus expectations for a much more modest decline to 92.8.  As a result of that larger than anticipated drop, the index is now below the COVID low and down to the lowest level since January 2013.

As the headline number is now in the 6th percentile of its historical range, several other components are similarly depressed including a record low reading in expectations for the economy to improve.  Although some indices have managed to hold up decently—for example, reported inventory levels and the difficulty in filling openings remain in the top few percentiles since the survey began—breadth in June was very weak with many of the declines being historically large.

As we noted in today’s Morning Lineup, labor market indicators within the report have cooled off in recent months but remain at historically impressive levels.  Meanwhile, inflation readings are also continuing to come in very elevated in spite of coincident declines in sales expectations.

Again, the worst category of the report was the reported outlook for general business conditions.  This index set the bar for a record low even lower as a net 61% of respondents reported that they expect the economy to worsen in the months ahead.  Given this, there is also a historically muted share of respondents reporting now as a good time to expand their businesses.  That reading came in at a meager 3, which alongside April 2020 and March 2010, was the joint lowest level since March 2009.

The NFIB also provides some detail as to why businesses are reporting such a soured outlook regarding expansion.  Half of the responses blamed broader economic weakness as the reason. Ironically, that goes against the fact that only 2% reported weak sales would be a reason while another 3% reported strong sales would be the reason to expand. Additionally, while inflation remains such a major concern, only 4% blamed higher costs as a reason to not expand. So while half blamed economic conditions as the reason not to expand, there were some contradictory cross currents.

While it is a drastically lower share at only 10%, the next biggest reason for not expanding was the political climate. As we have frequently noted in the past, one issue with the NFIB survey is that there has been a sensitivity to politics, namely a bias in favor of Republicans. Given the Democratic administration, it is not exactly surprising that political climate would come in second.

Another interesting point to note on this month’s survey regarded the uncertainty index. This measure essentially tracks the number of times respondents select “uncertain” or “don’t know” as an answer to a survey question.  Here was another index that has reached the lowest level in over a decade. This month’s low reading would imply that firms have a decidedly negative outlook for the economy.

While sales expectations are down near the worst levels since the Global Financial Crisis and the COVID Crash, actual observed changes in sales have not yet cratered in the same way.  That being said, on net there are more firms reporting lower sales than higher.

In other words, small businesses expect sales to get much worse than what current levels of sales would have historically implied.  As shown below, the spread between those two indices has only been lower once on record and that was at the start of the pandemic.  Similarly, the record low in General Business Outlook starkly contrasts with where the headline optimism index has been sitting.  That spread is at a record high meaning again economic outlook is far worse than the overall level of optimism.

Today, the KraneShares CSI Chinese Internet ETF (KWEB) gapped down by 4.1% due to regulatory pressures from the Chinese Communist Party and an uptick of COVID cases in a few Chinese cities. Since KWEB’s inception in August 2013, the ETF has only gapped down by 4%+ 12 times, the largest of which was an 11.6% drop in March of 2020 during the height of the COVID crash. Following these weak opening gaps, KWEB has tended to partially recover throughout the day, booking a median gain of 1.6% between the open and the close. However, today the stock bucked that pattern and continued to decline from the open to close falling an additional 2%, resulting in a total loss of over 6%.

Following prior downside gaps of 4%+, KWEB has bounced back by a median of 3.7% the next day, with positive returns nearly two-thirds of the time. Over the course of the next week, KWEB has posted a median gain of 1.0%, which is 0.6 percentage points better than the average of all periods. For all the time periods that we looked at, KWEB’s median performance following these occurrences has outperformed the median of all periods, apart from the following month. Three months later, KWEB has booked a median gain of 9.0%, which is 7.5 percentage points higher than the 1.5% average for all periods. Click here to learn more about Bespoke’s premium stock market research service.

On the front page of most news sites today is the headline that Elon Musk has officially sent notice terminating his deal to acquire Twitter (TWTR).  Similar to the way other celebrities have appeared to be major catalysts for a stock in the past year, like Joe Rogan and Spotify (SPOT), Musk’s interest in one of the cornerstones of social media has played a major role in the movements of TWTR’s stock this year.  Below, we show a timeline of the saga overlaid on the charts of TWTR’s stock price and the daily percent change since the start of the year.

Back in early April—only a little more than a week after Musk tweeted a poll regarding the platform and free speech then following up with a tweet mentioning the “consequences of this poll will be important”—markets got confirmation that one of history’s wealthiest people had become the company’s largest single owner of Twitter with a 9.2% passive stake. That sent the stock surging 27.12% in a single day.  The following day, TWTR rose another 2% when the company extended an offer for him to join the Board of Directors. That was an offer that would be rejected only a few days later as the stock began to reverse some of the massive gains. TWTR would not go on to turn around until Musk officially offered to buy the company at $54.20 per share (4/14), his financing was confirmed (4/21), and finally, when a deal was reached (4/25).

We always say how the market is forward-looking, and it appears as though Mr. Market knew the deal was fake news the entire time.  On the day the deal was announced, TWTR peaked a few dollars short of Musk’s proposed price and has been on the decline ever since.  The worst of the reversal occurred in mid-May as Musk expressed a hold-up regarding the company’s tracking and reporting on fake/bot accounts. A lack of resolution to Musk’s reservation has been the justification for the undoing of the deal which was confirmed last Friday, resulting in Twitter shares to fall 13.74% since last Thursday’s close.

Finally, we would also note that even though Twitter (TWTR) is a major player in the social media space, it is way down the list in terms of the S&P 500’s largest stocks; especially after the recent drop. Conversely, Musk’s Tesla (TSLA) is currently the fifth-largest stock in the index based on market cap indicating it has an outsized impact on the moves of the S&P. Given all the recent events and Musk’s involvement, Twitter and Tesla have been trading increasingly in sync with one another over the past few months implying these moves in Twitter to some extent actually have ripple effects for the broader market via sympathetic moves in TSLA. For example, while Twitter is down 9.5% today as of this writing, TSLA is falling 6.5%.

Below we show the correlation between the daily moves in TWTR and TSLA on a rolling 2-month basis which would roughly cover the period when the Twitter deal came into question and shares began to roll over.  Historically, the two stocks have had a modest positive correlation with a handful of stints in which that relationship became very strong like late 2018, the COVID Crash, and the first quarter of this year when growth stocks broadly fell together.  This year, that correlation weakened a bit as the Twitter acquisition news began to develop, but since the deal began to fall apart, it has started to rip higher once again with the current level entering the top decile of historical readings. Click here to learn more about Bespoke’s premium stock market research service.