Inside Markets — Soft Landing Scenario

The SPX currently sits ~60bp below the all-time high of 5254 made on March 28 when 10-year Treasury yields were 4.20%. Ten-year yields closed the following day at 4.31% on a sharply higher ISM manufacturing prices paid component. Ten-year yields peaked at 4.70% on April 25th with a corresponding ~5.5% pullback in the SPX.  Ten year yields are now sitting at ~4.45% with a break below ~4.35% likely required for a retest of 5254 to be successful.

Tomorrow’s April CPI print and retail sales report are key near-term catalysts for bond yields and the SPX.  After today’s hotter PPI report, an inline headline CPI print of +0.4% would keep 10-year yields from breaking below ~4.35% and may generate some downside in the SPX.  A headline number between 0.30%-0.35% could result in 10-year yields falling below 4.35% and ~1% upside in the SPX to a new but tentative record close.  Retail sales are quoted in nominal terms, so upside results often reflect increased prices and the consumers ability to pay them.  Consensus is looking for headline retail sales of +0.4%, down from +0.7% last month, and retail sales ex-autos of +0.2%, down from +1.06%.  Anything between consensus and last month’s number will likely be a non-event for markets.

In our opinion, the soft landing scenario is the only macro-economic outcome that will allow equity prices to move materially higher from here.  Unfortunately, history has proven that an economic soft landing where inflation moves lower while the economy remains resilient and earnings accelerate is extremely difficult to engineer.  An inline CPI print and uneventful retail sales report tomorrow should keep the soft landing narrative alive, but the fundamental case for a positive equity risk/reward would be increasingly difficult to underwrite.