Today's Charts & Ideas: What Markets Are Telling Us #26

06/27/2025 | Unsubscribe

Good Morning!

Here are some important charts and ideas capturing the latest trends in US markets to help you understand what is happening from multiple different perspectives:

✅ What the Chart Shows

This chart from Goldman Sachs compares:

• S&P 500 Index levels (SPX) — shown in blue.

• Average Funding Spread (2nd and 4th Fed Funds futures contracts) — shown in red, representing professional investor positioning costs or hedging dynamics.

Key highlights:

• The funding spread (right axis) has dropped significantly since late 2024, even as SPX attempted to rebound.

• A clear divergence is emerging: equities have bounced, but funding spreads have not kept pace.

💼 What This Could Mean for You

• 🏦 Cautious Institutional Positioning: Professional investors remain conservative despite the SPX recovery. This could limit near-term equity upside if big funds aren’t deploying more capital.

• 🧭 Sentiment-Liquidity Disconnect: Retail or passive flows may be powering equities, while professional money is still defensive — a potential fragile rally.

• 📉 Risk of Downside if Spread Signals Are Right: Historically, low funding spreads like this have preceded corrections or periods of lower equity returns.

• 🧠 Tactical Implications: For active investors, this divergence may suggest it’s too early to chase the rally unless spreads confirm.

🔁 Alternative Perspectives to Consider

• 🪟 Lag in Positioning Could Be Bullish Fuel: If professionals start catching up to equity prices, it could add upside momentum as they “chase performance.”

• 🔄 Funding Spreads May Reflect Macro Hedges, Not Equity Views: These spreads might be more about macro uncertainty (e.g., rates or FX hedges) than direct bearishness on stocks.

• 🧮 Positioning is a Contrarian Signal: When institutional investors are underweight or cautious, it has historically increased the probability of continued market strength if no shock materializes.

✅ What the Chart Shows

This chart plots:

• US 10-Year Treasury Yield (dark line, right axis)

• Bloomberg US Labor Market Surprise Index (light blue line, left axis)

Key observations:

• The Labor Market Surprise Index reflects how US employment data is performing relative to economists’ expectations.

• Historically, positive surprises in employment (rising blue line) are associated with rising 10-year yields, indicating that stronger-than-expected labor markets push yields higher.

• Since early 2024, the relationship has generally held, with both series rising together into mid-2025.

💼 What This Could Mean for You

• 📈 Sticky Yields: Persistent labor strength may keep long-end yields elevated, reducing the chances of aggressive Fed easing.

• 💡 Bond Market Insight: Watching labor surprises offers a real-time gauge for interest rate trends — strong jobs = higher yields.

• 📊 Portfolio Sensitivity: Sectors and assets sensitive to rates (e.g., tech, utilities, real estate) may struggle if labor strength sustains higher bond yields.

🔁 Alternative Perspectives to Consider

• 🧩 Decoupling Risk: Labor data may surprise without impacting yields if inflation or Fed policy diverges — correlations can break.

• 🌐 Other Drivers in Play: Treasury issuance, global flows, inflation trends, and geopolitical risks also heavily influence yields.

• 🕰️ Lag Effect: Yields may react with a lag to labor surprises, especially if broader economic data or policy expectations shift mid-cycle.

✅ What the Chart Shows

• This chart tracks how often companies in the S&P 500 (white line) and Russell 3000 (orange line) mention the term "reshoring" in their earnings call transcripts each month.

• There has been a massive spike in May 2025, hitting an all-time high in reshoring mentions, particularly among Russell 3000 companies.

• The upward trend has been building since 2021, indicating growing corporate interest in bringing production and supply chains back to the US.

💼 What This Could Mean for You

• 🏭 Manufacturing Revival: A reshoring wave may boost US-based industrial, logistics, and automation firms as companies invest in domestic capacity.

• 🇺🇸 National Security & Supply Chain Resilience: Reshoring reflects strategic moves to reduce foreign dependency, especially on geopolitical rivals.

• 📈 Opportunities in Smaller Caps: Russell 3000 firms (many small/mid caps) are leading reshoring mentions, which could make them key beneficiaries of the trend.

• 🏗️ Capex and Labor Demand: A domestic buildout may fuel infrastructure, construction, and skilled labor demand, and pressure margins in the short term.

🔁 Alternative Perspectives to Consider

• 💰 Cost Pressures: Reshoring is expensive. Higher labor and regulatory costs in the US could hurt profitability or raise consumer prices.

• 🕰️ Execution Risk: While intent is rising, actual reshoring is a multi-year process. Enthusiastic talk may not immediately translate into action.

• 🌍 Global Trade Balance: Increased reshoring may provoke retaliatory measures or friction with trade partners, especially if tariffs or incentives are involved.

✅ What the Chart Shows

This dashboard from Augur Infinity highlights growing signs of Treasury market dysfunction across four indicators:

🔹 Augur Treasury Dislocation Index (Top Left)

• Measures deviation from fair value pricing.

• Sharp rise since April 2025, indicating increasing pricing inefficiencies in the Treasury market.

🔹 Treasury Futures Rich/Cheap Spread (Top Right)

• Compares futures prices vs. equivalent cash bonds.

• Ultra Long Bond futures (WN) have become rich relative to cash, suggesting delivery frictions or demand distortions.

🔹 USD SOFR Swap Spreads – 30y (Inverted) (Bottom Left)

• Swap spreads have tightened further into negative territory, signaling that long-end Treasuries are cheapening vs. swaps.

• Often a sign of liquidity stress or mismatch in collateral flows.

🔹 TIPS vs. Nominal Relative Liquidity Spread (Bottom Right)

• The liquidity premium on TIPS has widened to ~35bp, implying diminished liquidity in inflation-linked bonds vs. nominal Treasuries.

💼 What This Could Mean for You

• 📉 Liquidity Fractures = Price Volatility
  Bid-ask spreads may widen; inefficient price discovery could raise volatility across all asset classes.

• 🧮 Portfolio Hedging Costs May Rise
  Due to market distortions, hedging via swaps/futures could become less efficient or more expensive.

• 🧩 Early Signal of Systemic Strain
  These indicators often precede credit stress, collateral issues, or Fed transmission breakdowns—watch closely.

• 🛡️ Flight to Quality or Liquidity Shift
  Investors may rotate toward safer or more liquid assets, especially if Treasury dysfunction deepens.

🔁 Alternative Perspectives to Consider

• 🟢 Auction or Hedge-Driven Distortions
  Some spread anomalies may reflect technical events, like auctions or futures rollovers, not fundamental stress.

• 🟡 Tactical Arbitrage Opportunities
  Divergence between futures and cash may create profitable basis trades for well-positioned institutions.

• 🔄 Risk of Fed or Treasury Intervention
  Prolonged dislocations could invite policy action or liquidity support to stabilize the functioning of the Treasury.

• ⚠️ Not Yet a 2008-Style Crisis
  These stress signals are notable but not at crisis levels—monitor closely for spillovers into repo or T-bill markets.

Bottom Line:
Treasury market functionality is deteriorating, signaling potential liquidity and credit risks. While not yet critical, this is a flashing warning light for risk managers, macro traders, and policymakers alike.

✅ What the Chart Shows

This chart from Piper Sandler via Michael Kantrowitz (shared by Yahoo Finance) maps how different 10-year US Treasury yield levels historically correlate with stock market performance:

• 5.0–5.5%+ Yield:
  🔴 Broad issue for all equities — high rates pressure valuations, especially for growth stocks.

• 4.5–5.0% Yield:
  🟠 Pressure zone — rate-sensitive and lower-quality stocks tend to underperform.

• 4.0–4.5% Yield:
  🟡 Neutral zone — not stimulative but not highly restrictive either.

• 3.5–4.0% Yield:
  🟢 Favorable for equities — aligns with stable growth and balanced market conditions.

• 3.0–3.5% Yield:
  🔵 Recession watch — lower yields signal risk-off sentiment or a slowing economy.

• <3.0% Yield:
  ⚫ Crisis zone — often reflects extreme policy accommodation (ZIRP-era behavior).

As of May 21, 2025, the 10-year yield is near the upper edge of the 4.5–5.0% band, placing markets in a stress zone for more vulnerable equity sectors.

💼 What This Could Mean for You

• 📉 Pressure on Growth Stocks:
  High yields raise discount rates on future earnings, hitting tech and long-duration assets hardest.

• 🧱 Favor High-Quality or Defensive Stocks:
  Companies with strong cash flow and low rate sensitivity (e.g., staples, healthcare) may outperform in this zone.

• 🏛️ Financial Sector Watch:
  Banks could benefit from a steepening yield curve if credit quality and loan demand hold up.

• 🪙 Bond Alternatives Gaining Appeal:
  Treasury yields near 5% boost the relative attractiveness of fixed income and money market funds for conservative investors.

🔁 Alternative Perspectives to Consider

• 💪 Resilient Economy Narrative:
  Rising yields may reflect stronger-than-expected growth or sticky inflation, potentially extending the equity bull cycle, especially for cyclicals.

• 📊 Earnings Momentum May Absorb Yield Pressures:
  If corporate profits stay strong, equity markets may withstand the higher yield headwind.

• 🌀 Volatility Risk Rising:
  Higher yields can spark sector rotations and style divergences — even if broad indices stay flat.

• 🧭 Fed Path Uncertainty:
  If the Fed surprises hawkishly or yields rise beyond this range, the equity risk could escalate sharply.

Bottom line:
This chart provides a clear framework—where yields settle will determine not just if equities rise or fall, but which sectors and styles will lead or lag.

That’s it for today!

Best Regards,

Ultimate Alerts Team

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