Inside Markets — Tactically Bearish

The SPX keeps a bearish bias at levels below 5447, with investors demanding a higher risk premium following last Monday’s volatility spike.

PPI has been relatively contained over the last 18 months but the 3-month average has trended higher. There’s some concern this could eventually bleed into CPI or corporate profit margins. One of the elements impacting PPI has been the sharp rise in shipping costs due to missile attacks in the Red Sea and retailers pulling-forward demand ahead of a potential strike by port workers.

Consensus is looking for headline CPI to rise +0.2% MoM vs. -0.1% last month. If realized, the YoY rate would still fall under 3%. A hotter-than-expected print would be an unwelcome development for fixed income markets in particular given implied pricing for a 50bp rate cut in September. Equity markets would also have a negative reaction, but maybe less due a perceived delay in shelter disinflation.

This is the most important macro report of the week given its correlation to GDP growth and the surprise weakness in the June retail sales report. Consensus is looking for headline retail sales to be up +0.4% MoM and +0.1% ex-autos.

Last Monday’s spike in realized equity volatility (VIX>65 intraday and 39 close) was fueled by an unwinding of the yen carry trade. While the cause may be technical in nature rather than fundamental, the impact on equity markets is the same. Higher volatility results in lower forward multiples (investors demand a higher risk premium) and will act as a headwind for rally attempts.

The SPX broke its bullish trend after July payrolls missed on Friday, August 2. The technical outlook remains tactically (short-term) bearish until the index is able to sustain levels above the downside gap at 5447. The macro-fundamental outlook is also tactically bearish given the potential for Fed rate cuts to viewed as a sell-the-news event. The US economy appears to be slowing and reactive rate cuts will likely suggest that the Fed has, once again, fallen behind the curve. With an implied neutral rate of ~4%, the Fed is at least 100bp offsides. In our view, equity investors will choose to ‘look across the valley’ when rate expectations three months forward come closer to ~4% (now ~4.6%).