Inside Markets — Busy Week

Yesterday’s recovery in US equities was primarily driven by short covering into a busy week of earnings.  Equity baskets with the highest short-interest gained more than +2% yesterday vs. +0.90bp for the SPX.  Short-covering is still the main driver this morning but participation is more broad-based after better-than-expected aggregate earnings.  There should be no stigma attached to a short-covering rally as almost all cyclical bull markets start this way. But hopes for a more sustained rally this week will largely depend on earnings from META (tomorrow), GOOGL/MSFT (Thursday) and March core PCE (Friday).  Last earnings season, all Mag 7 companies beat a relatively high bar.  The Mag 7 earnings bar is actually lower this quarter with the potential for AAPL and TSLA to miss consensus and possibly  disappoint whisper numbers.

The bar for Friday’s core PCE print is also relatively low given hot March CPI/PPI prints and the sharp repricing in Fed rate expectations.  PCE and CPI are calculated differently but neither measure reflects shelter price deflation that’s prominent in high-frequency housing data.  Last week, BX management noted moderating shelter costs in their portfolio, while Former Fed Chair Ben Bernanke wrote an article over the weekend questioning the central bank’s backward-looking forecasting methodology.  Of course, the bond market mostly takes cues from the official data and from Fed messaging, which has started to sound far more hawkish than it did last month.  Monthly inflation data that captures some of last year’s shelter price deflation would result in lower yields, curve steepening and upside for equity markets.

We keep our tactically bearish technical outlook on the SPX until it sustains a break above its 50-day moving average, now at 5119.  Normally we wouldn’t care, but CTAs and other trend-following strategies use simplistic technical levels like the 50-day moving average as buy/sell triggers. Last Monday’s break below 5118 led to accelerated downside momentum and the SPX now needs to clear this level to remove the threat of incremental selling pressure