Inside Markets

Inflation remains top of mind as the initial equity market reaction to today’s CPI print matches our scenario analysis from yesterday’s note. 

Tomorrow’s June CPI report is an important catalyst for markets with consensus looking for a headline number of +3.2%, down from +4% in May.

Friday’s softer non-farm payroll number was the first miss after 14 consecutive months of hotter-than-expected readings.

The S&P 500 (SPX) decelerates on its approach to technical resistance in the 4515-4535 range as the rally shows signs of exhaustion.

Today’s advance in 2-year yields drives the risk free rate beyond the earnings yield on the SPX. Using Bloomberg consensus estimates, the forward earnings yield on the S&P 500 is 4.99% vs. a two-year risk free Treasury that currently yields 5.08%.

The soft landing narrative is challenged as weaker factory orders number lead to the first downtick in the US Economic Surprise Index (ESI) in nearly two weeks. 

The S&P 500 (SPX) has been able to keep its upward momentum despite rising bond yields. Over the last six sessions, we’ve seen growth data inflect higher, while inflation data has cooled.

US data is back in focus after a steep drop in weekly jobless claims and big upward revision to Q1 GDP. The improved data leads to another leg higher in the US Economic Surprise Index (ESI), higher bond yields and cyclical sector outperformance.

Mixed messages inform the near term SPX outlook. The overbought status we referenced for the S&P 500 (SPX) on Friday June 16 was derived from slowed stochastic oscillator that measures price and time.

The primary driver this morning is US economic data that is better than expected. May durable goods orders posted an upside surprise for a third straight monthly increase.