Inside Markets — Downside Gap

The SPX has already recovered all losses from last Monday’s yen-induced sell-off but remains below the post-payrolls downside gap at 5447 from the preceding Friday. In our opinion, the index needs to sustain levels above the gap at 5447 to reestablish a bullish technical trend.  Today’s cooler July PPI print takes bond yields lower and secular growth stocks higher, but cyclical groups lag due to lingering recession concerns.  The downside gap at 5447 followed a payroll-induced growth scare and investors may need an inline or better retail sales number to recapture that level. Consensus is looking for headline retail sales of +0.4% but something north of +0.1% could be enough if tomorrow’s CPI print looks anything like today’s number.

We have a tactically bearish outlook on the SPX until it reestablishes a bullish trend above 5447.  The Fed funds rate is currently ~100bp above neutral but this has been the case for months.  In our opinion, the path to rate cuts still runs through weaker labor markets, which increases the risk of the Fed falling behind the curve.  The good news is there’s plenty of room for the Fed to ease and investors will likely look across the valley to the recovery ahead once the 3-month forward curve implies a neutral (~4%) funds rate.