September 21, 2023
Today’s risk-off trade follows yesterday’s Fed meeting and updated dot plot that removed 50bp of easing expectations in ’24. The median dot for ’26 also moved up to 2.9% vs. the 2.5% long-run view and Powell emphasized the Fed’s ‘higher for longer’ message, while reiterating that policy is data dependent. August PCE, scheduled for release next Friday (9/29), will be the next data point that matters.
The Summary of Economic Projections (SEP) also included a relatively trivial weakening of growth expectations and labor markets, while its inflation outlook remained essentially unchanged. To his credit, Powell refused to endorse the soft-landing narrative implied by the updated SEP. Nonetheless, the rosy outlook implied by the updated SEP generates a temporary credibility problem for the Fed.
US weekly jobless claims fit the soft-landing narrative after undershooting consensus, while the September Philly Fed index and August existing home sales missed expectations. The Philly Fed showed declines in shipments and new orders, while prices paid and received both increased.
Yesterday, the Russell 2000 (RTY) broke support near its 200-day moving average after a bearish distribution pattern developed in late August. The RTY is just one of several major indices that have developed bearish distribution patterns including the S&P 500 (SPX), Nasdaq 100 (NDX), Philadelphia Semiconductor Index (SOX) and EURO STOXX 50 (SX5E) to name the most prominent. The SPX, SOX and SX5E are all near key support levels today, with a downside break likely to lead to accelerated selling pressure. The RTY has been one of the weakest US markets this year and we see another ~8% downside from current levels. A similar break from the SPX may generate as much as -15% downside. Key support for the SPX sits at 4335 with a sustained lower close and rising VIX starting the process. The VIX has drifted from 12.8 to 16.13 over the last five days and a spike through 22 would increase conviction in our tactically bearish outlook.