Caution ahead of Powell’s address tomorrow was cited for Monday’s weakness in equity markets. Given the recent pullback in inflation data, any hawkish leaning commentary would likely be directed at the labor market, which remains exceptionally tight.
Monday’s sell-off was attributed to fears that Powell will delivering a hawkish speech this Friday. But there doesn’t seem to be any reason why Powell needs to deliver a hawkish speech.
A few months ago, we suggested the Saudis response to an Iran nuclear deal (they don’t get along) would likely include reduced production. Over the weekend, Iran dropped some of its major demands for a nuclear deal, which has increased the probability for an agreement
OIS forwards are pricing in an even probability (50/50) for a 50bp or 75bp hike at the 9/21 Fed meeting. Powell gives his annual Jackson Hole address next Friday (8/26), but we shouldn’t expect much guidance given the August Jobs Report due on 9/2 and
Increased short covering gets most of the credit for the ~18% S&P 500 (SPX) rally off the mid-June low as stocks with the highest short interest squeezed higher.
The fundamental backdrop for equities remains bearish with a 3.50% terminal funds rate and deeply inverted 2/10 yield curve. Bearish sentiment and light positioning provide support, while the magnitude and duration of the recent rally challenges our definition of a reflex rally during a bear
The CBOE Volatility Index (VIX) has now decelerated to neutral levels near 20. Elevated realized volatility usually serves as a strong headwind for sustained equity rallies.
The S&P 500 (SPX) managed to push through key technical resistance near 4180 after the NY Fed’s prices paid/received component showed sharp deceleration.
The S&P 500 (SPX) is higher after this morning’s cooler CPI print into technical resistance at ~4200. Old support levels that break tend to make strong resistance on recoveries with the 4150-4200 range holding until late-April.
Tomorrow’s July CPI report is the most important inflation catalyst this week, but it’s not the only one. July PPI will be released Thursday, while Friday brings import/export prices for July and inflation expectations in the August Michigan consumer sentiment survey.
