Inside Markets — Gradual Approach

Yesterday’s strong Tech rally followed comments from NVDA CEO Jensen Huang who discussed a trend toward densification and data center acceleration at a sell-side industry conference. He also pointed to evidence of higher customer ROI (hyperscaler revs) from sustained strength in the demand for accelerated compute. Huang’s bullish comments followed similar remarks from ORCL on Tuesday with some room for upside given that many Tech stocks are off overbought extremes. We also point to increased demand for secular growth stocks after yesterday’s small backup in bond yields interrupted a six-day pullback.

OIS markets are currently priced for 32bp of cuts next week (closer to 25bp than 50bp), followed by another 39bp in November and 42bp in December for a total of 113bp by year end. Our long-held outlook is for a 25bp September rate cut given the Fed’s tendency to take a gradual approach unless something is seriously broken. The last two employment reports were objectively bad given negative payroll revisions, but the Unemployment Rate dipped 10bp and August core CPI was a touch firmer. The Fed funds rate remains at least 200bp above the most conservative estimates of neutral (R-star), but it would take a significant miss from Tuesday’s retail sales report to induce a 50bp cut in our view. Deceleration into a soft landing and the beginning stages of a recession look identical but given the setup, a 25bp cut would likely be the more favorable outcome for equity markets.

The SPX has been able to avoid a bearish break below 5440 thus far and is lifting into a challenging seasonal window that also includes a month-long rolling corporate buyback blackout window (starting Monday). The two-session rally has been undeniably strong but partially driven by slightly higher bond yields. Tuesday’s retail sales report is an important catalyst with a stronger print likely to drive a performance chasing rally into channel resistance in the 5720-5760 range.