Morning Notes — Buyers Higher

The S&P 500 (SPX) has rallied ~4% off the lows through yesterday’s close, but the buyers are likely higher. There doesn’t seem to be a shortage of skepticism for the recent bounce, which keeps the pain trade skewed to the upside. A number of popular CTA buy triggers exist just above 3800 with ~3900 as the most significant near term resistance level. A better than expected Q3 earnings season is still the near-term fundamental driver with accelerated buyback activity likely to start when the blackout window begins to close next week. Terminal Fed expectations remain the largest fundamental driver with the November 2 FOMC meeting and November 10 CPI report as the most significant near-term catalysts.  In the meantime, bond markets will take cues from Fed speeches and indirect inflation data. Takeaways from Fed officials over the last 18 hours have taken terminal rate expectations back to the highs near 4.97%, whereas Bullard’s comments from last week suggesting front-loading rate hikes (75bp in Nov and 75bp in Dec) before a December pause had the opposite effect. Getting the SPX to ~3900 will require lower terminal rate expectations with levels below 4.75% likely resulting in a breakout to the 4100-4200 range.

Crude: Outperformance in Energy follows another SPR release from the Biden administration.  Today’s release of 15M additional barrels was lighter than expectations for a 25M barrel release and may reflect concern over eventual pushback.  Total administration SPR releases and the pulling forward of congressionally-mandated sales in fiscal ’23 (October ’22-September ’23) will take the US SPR down to ~350M barrels, its lowest since 1983 when US economy was one-third its current size based on GDP.  Crude prices have surrendered most of the post-OPEC+ production cut rally based on OPEC+ non-compliance, lower global demand concerns, potential supply from Venezuela and these temporary SPR releases.  However, the US decision to surrender its role as swing producer to OPEC+ almost ensures sustainably elevated oil prices.

Inflation: A bottoms-up look at CPI components suggest headline inflation will decelerate by 100bp (last report was +8.2%) over the next two months with high-frequency data pointing to a sub-3% number by the middle of next summer.