September 6, 2023
ISM services for August came in stronger than expected with new orders, employment and prices all higher MoM. The data keeps upward pressure on bond yields that rose yesterday in response to dollar strength, higher oil prices and increased corporate issuance. It’s otherwise quiet in terms of data with attention on speeches from three Fed officials today and four tomorrow. Boston Fed President Collins said she doesn’t think the central bank is ‘there yet’ on containing inflation, but also noted we may be very near or at peak rates.
Today’s ISM reinforces renewed concerns around sticky inflation into next week’s CPI print. Base effects that were a tailwind for YoY CPI disinflation over the past 9 months are now a headwind, making an equity-friendly inflation surprise less likely. As discussed yesterday, Fed officials want to see at least three consecutive months of declining inflation before signaling an end of the hiking cycle. We’ve mapped out the next several CPI prints and see Q1’24 as the earliest window to achieve three sequential declines.
An announced end of the hiking cycle remains the fundamental driver behind any equity rally. Unfortunately, we see ongoing monetary policy uncertainty capping any rally attempts for the foreseeable future. For the S&P 500 (SPX), we’ve identified technical resistance at ~4525 as the near-term cap with the bullish inflection near 4200 as support. A temporary pause in the disinflation theme probably makes this a ‘bad news is good’ phase when it comes to most economic growth data. However, it’s important to note that a ‘bad news is bad’ phase can quickly develop when labor market data disappoints and consumer credit begins to crack. Bond yields would move lower in that scenario, but the SPX would break well below 4200 with growth sectors outperforming in relative terms only. This scenario would also set us up to add exposure in deep cyclical stocks once the 5/10 yield spread moves above +19bp.