Author: jsc

Today’s FOMC had been the primary focus for markets this week, but attention will quickly turn to tomorrow’s ECB meeting.

The S&P 500 failed to break pattern resistance yesterday with intraday levels suggesting a pullback to immediate support into last Tuesday’s upside gap around 4590.  

Look for the Fed to double its tapering pace to $30B/month on Wednesday with the updated dot plot showing 3 hikes in 2022.

Today’s in-line CPI report and Wednesday’s JOLTS report that implied tighter labor market conditions won’t change the near-term narrative on inflation. It’s not hard for inflation rates to decline from here given much tougher comps starting in December, but the theme looks like it will

Tomorrow’s CPI report will undoubtedly have an impact on markets.  From a longer-term perspective, inflation rates impact equities/equity valuations through four main inputs.

The fundamental landscape remains solid with bond yields, commodity prices, PMI data and earnings revisions keeping the balance of risks aimed higher.  Incoming macro data has also been supportive with the US Economic Surprise Index advancing well into positive territory. 

The global cyclical recovery and reflation theme will likely be the dominant market narrative if the Omicron variant turns out to be a non-factor and China’s credit impulse improves as some expect.

The CBOE Volatility Index (VIX) closed above it’s 50, 100 and 200-day moving averages every day last week.  Increased volatility commands a higher equity risk premia/lower acceptable multiples.

Government entities, Pharma and Health Care providers all cite a 2-week timeline to analyze the new variant.  Friday’s outsized move was helped by thin holiday liquidity and today’s buy-the-dip reaction is fairly typical.

The same positioning indicators have Energy as the most crowded sector short, with long positioning down ~90% over the last decade.