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Inside Markets — Slowing Growth

Realized Volatility

July 3, 2024

The US Economic Surprise Index (ESI) has dropped to -47.5 after today’s data. The US economy is clearly showing signs of slowing with markets focused on the potential upside from the start of a Fed easing cycle. The apparent slowdown in growth could be an underappreciated risk factor for equities as investors apply templates from easing cycles of the recent past. Near-term inflation data will be the key gating factor when it comes to the magnitude and duration of this assumed easing cycle.

In comments yesterday, Powell seems to move further away from ‘super core’ PCE as his top inflation indicator to labor market data. Services inflation has been stickier than other measures because it’s more closely tied to wages. Since late March, it’s been apparent that the path to Fed rate cuts would run through weakening labor markets with the next update due this Friday. We’re looking for June nonfarm payroll gains of +200,000 and an unchanged Unemployment Rate of 4% with wages up +0.3% MoM and +3.9% YoY, down from +4.1% in May. Nonfarm payrolls have averaged +230,000 over the past year with the last three months averaging +249,000. Nonfarm payroll gains have been far stronger and more resilient than almost every other measure of employment. One reason for this could be high immigration inflows as the ‘establishment survey’ is based on a simple headcount. On the other hand, the ‘household survey’ that’s used to calculate the Unemployment Rate is based on a payroll-adjusted concept of inflation. The average implied payroll gain over the last year from the household survey has only been +18,000/month.

The price objective for the SPX remains unchanged at 5550. We see the potential for an overshoot as near-term sentiment remains cautious and the ‘pain trade’ stays skewed to the upside. The bullish trend remains intact at levels above 5375 with levels below 5230 triggering a tactically bearish outlook. From a fundamental point of view,
at/above-trend GDP, positive EPS growth and a paused Fed keeps the bullish trend intact.

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