Technical resistance for the S&P 500 (SPX) remains in the 4150-4200 range. The SPX has now rallied +13% off the June 16 low of 3667. In the days leading up to the June 16 low, we explained the increased likelihood for a mid-teens reflex rally
It’s hard to reconcile today’s strong jobs report with the recent rise in jobless claims and long list of anecdotal corporate hiring freeze announcements. Bond and FX markets react as one would expect with higher Treasury yields, stronger dollar and terminal Fed expectations rising 20bp
With inflation and Fed policy in focus, equity markets would prefer that tomorrow’s Jobs Report come in weaker rather than stronger. Roughly two-thirds of core inflation comes from wages and the compression of labor income is considered the only lasting source of disinflation.
The past two days of hawkish Fed rhetoric has pushed terminal Fed expectations from ~3.25% to ~3.45%. We’ve been following a tight negative correlation between equity performance and terminal Fed expectations since early-May when it was apparent that 10-year inflation breakeven yields had rolled over.
The prices paid component in yesterday’s ISM manufacturing survey for July declined by a record -18.5 points MoM to 60.0. ISM is a business survey, so the inflation relationship flows to PPI, which tends to lead CPI data by ~3 months.
Most of the downside in yields is currently being driven by illiquid conditions during a seasonally slow period for Treasury issuance. Ten-year Treasury prices are extremely overbought (yields at 2.61%) and the put/call ratio is now more than 2 standard deviations above the mean.
The 10-year Treasury yield is down -11bp to 2.674% and ready to test strong technical support at ~2.64%. Expect that level to hold with the benchmark yield likely to stay in a narrow range between 2.65% and 2.95% into the September Fed meeting.
A 75bp rate hike today would take Fed funds close to the neutral rate of ~2.50%. This puts increased attention on forward guidance and how the Fed will gauge its tightening cycle.
The peak inflation narrative really began back on May 9 when ten-year inflation breakeven rates traded below support at 280bps. The theme is now gaining credibility as realized data disappoints and inflation expectations in consumer/business surveys start to miss.
Ten-year bond yields fell ~24bp last week to 2.75%, reflecting increased recession worries. Following lagging indicators like GDP for signs of a recession will get you nowhere.
