Inside Markets

Equities are starting the week mostly lower into month-end and quarter-end rebalancing. Given the recent rally in equities and sell-off in bonds, we estimate an incremental ~$50B of equity supply will hit this week.

US, Eurozone and UK flash manufacturing PMI missed expectations and fell deeper into contraction, while services held up better. The US PMI data showed a cooling in employment, but firming wage pressures.

Tomorrow brings flash PMIs for June which will provide incremental guidance on the growth outlook. Expectations are for US flash manufacturing PMI to remain in contraction at 48.5, but recent strength in cyclical equity sectors may be signaling a higher print.

Markets are waiting for a traditional recession or soft landing to follow the Fed’s tightening cycle, but there may be a third template that fits better.

As the S&P 500 has rallied +6.8% over the last five weeks to technically overbought levels, consider markets can stay overbought or oversold for several weeks but consolidation to technical support levels near 4200 should first be considered a healthy development.

The S&P 500 has gained +5.7% since the index broke technical resistance at ~4200. Thin leadership and narrow breadth on the approach to 4200 were reasons to remain tactically bearish.  

We are pricing for a pause although the market-based probability of a July rate hike rises to 67% after yesterday’s revised dot plot implied two more hikes.

Markets wait on today’s Fed policy decision at 11am PT followed by Powell’s press conference  at 11:30. We expect the Fed will ‘skip’ a rate hike at this meeting with a hawkish statement and/or press conference as a counterweight to easing financial conditions that would

Widening market breadth beginning in late May removes a key technical concern for the sustainability for the rally. Participation from cyclical sectors and small cap stocks followed a sudden uptick in the US Economic Surprise Index (ESI) beginning on May 25.

Consensus is looking for YoY headline CPI to drop to +4.1% from 4.9% last month and the core rate falling to +5.3% from 5.5%. A headline CPI print of +4.9% or higher is a bearish tail risk scenario given recent sharp declines in food and