Inside Markets — Incremental Caution

Summertime liquidity conditions and the potential for risk-off positioning into September macro data/seasonal weakness add incremental caution to our tactically bullish outlook. While the path to a Goldilocks economic outcome is narrow, we expect investors will look through softer data given the Fed’s ability (1-year real yield at +165) and willingness to ease.  The next major update on Fed willingness will be Powell’s Jackson Hole address on Friday 8/22.

Today’s hot PPI report contrasts with Tuesday’s better-than-feared CPI print that generated anticipation for a more aggressive Fed easing cycle and rotation into cyclical, rate sensitive baskets.  Tuesday’s CPI also triggered another hedge fund de-grossing and reflexive short-squeeze in high-beta/low-quality stocks.  De-grossing is common during the month of August given light attendance, low volume, and thin liquidity.  While today’s inflation update does little to disturb the large cap indices, it weighs on the small cap Russell 2000 (RTY) given its greater exposure to cyclical sectors and companies that issue floating rate debt.