Author: jsc

The S&P 500 (SPX) posted a second consecutive weekly decline with cyclical sectors underperforming defensive groups by 5.5% last week.

Cooler-than-expected June CPI and PPI from July made disinflation a major part of the consensus narrative.

This morning’s CPI print mostly supports the disinflation theme and keeps the focus on the outlook for the Fed’s hiking cycle.

Equity markets fully embraced the disinflation theme following a cooler June CPI print, but investors now seem a bit hesitant going into tomorrow’s July CPI report.

The recent widening in credit spreads should be closely followed in the days ahead. Recession risk has been priced out of equity markets, but rising recession risk usually starts in credit markets.

Last week’s pullback in equity markets was driven by a volatile week in the bond market.  The volatility may have been partially sparked by the US debt downgrade, but its impact on US sovereign Credit Default Swaps (CDS) was minimal at ~1.5bp.

We’ve recently intensified our focus on a 60-day tactical window based on a growing expectation for the Fed to end its hiking cycle.

Steep curve inversion and tepid US growth data from Q4’22-Q1’23 generated consensus for an imminent recession and led to a crowded long position in Treasuries.

Fitch explained its US credit rating downgrade as “expected fiscal deterioration over the next three years.

Yesterday’s Senior Loan Officer Opinion Survey (SLOOS) pointed to tightening lending standards and low demand.