The mid-October conditions that had us looking for a Q4 rally included technical signals (deep oversold conditions with momentum divergences) that were apparent in all major market inflections over the last 13 years.
The S&P 500 (SPX) is now consolidating gains from the post-CPI rally that took the index through technical resistance at 3900. Once broken, old resistance levels become new support and 3900 should hold as long as 10-year Treasury yields remain below 4%.
Deep oversold internal signals and momentum divergence (daily and weekly) from mid-October had Q4 expectations focused on a potential rally.
If you exclude shelter from last week’s core CPI print, you get a negative MoM core number, which implies deflation.
The S&P 500 has the potential to move higher than we initially expected given the post-CPI adjustment in terminal rate expectations and implied rate cuts 24 months out.
The bearish narrative includes 1) increased inflation expectations; 2) higher energy costs; 3) higher bond yields; 4) higher terminal rates; 5) expected cuts to FY’23 earnings and; 6) geopolitical shocks have been in place since mid-January and is beginning to feel a bit tired in
Implied rate cuts are something to watch alongside changes to Fed terminal rate expectations.
Yesterday’s +5.6% gain in the SPX followed a 27bp decline in terminal rate expectations and sharp increase in expected Fed easing 24 months after terminal rates have been reached.
SPX rally follows a cooler than expected CPI print. Consumer Discretionary, REITS and Tech are outperforming, while defensive groups like Health Care and Staples lag but still post solid gains.
Markets understand the major lags in many CPI components, so a hotter-than-expected print tomorrow may have less impact on equities than it did 6 months ago.
