Yesterday’s +5.6% gain in the SPX followed a 27bp decline in terminal rate expectations and sharp increase in expected Fed easing 24 months after terminal rates have been reached.
SPX rally follows a cooler than expected CPI print. Consumer Discretionary, REITS and Tech are outperforming, while defensive groups like Health Care and Staples lag but still post solid gains.
Markets understand the major lags in many CPI components, so a hotter-than-expected print tomorrow may have less impact on equities than it did 6 months ago.
Realized inflation data matters most for markets and near-term Fed policy with Thursday’s release of October CPI in view.
CPI/SPX Outlook is generally favorable following aggressive Fed comments last week. The post-FOMC speakers tour picks up this week with aggregate comments likely to sound less hawkish than Powell’s press conference last Wednesday
Near-term SPX is heavily dependent on terminal Fed Rate expectations, which rose into and out of Wednesday’s Fed meeting.
Catalysts ahead, including tomorrow’s Jobs Report, will likely impact terminal rate expectations, bond yields and equity markets.
It is fairly quiet ahead of today’s Fed Meeting (11am PT) and press conference (11:30am). The most likely outcome is a 75bp rate hike with no guidance on December so the Fed can to maintain optionality into 2023.
Catalysts ahead include Tomorrow’s Fed meeting, Friday’s Jobs Report and next Thursday’s CPI print.
Fed scenarios going into Wednesday’s Fed meeting lean equity friendly. Rate hike expectations range from 50bp to 100bp with 75bp the most likely outcome.