February 14, 2023
As we noted yesterday, we’re discounting the signal quality of the January payroll data given the outsized role of seasonal adjustment factors. We’re also discounting the supposed message in today’s CPI report given the large contribution from lagging shelter prices. The ‘no landing’ narrative that has partially contributed to the recent resiliency of equities ignores these mitigating factors. A bearish repricing of the Fed rate expectations would be bad for equity markets if the labor market is softer and inflation is cooler than these reports suggest.
The S&P 500 (SPX) currently rests in the middle of technical resistance between 4100-4200. We turned tactically bearish in mid-December as the index approached this range and the forward rate curve implied neutral Fed policy two years into the future. At that point, the good news was priced in and further upside requires fundamental justification. We’re still looking for that fundamental justification as the index bumps into resistance. Cyclical leadership that followed China reopening headlines in early January was an encouraging internal signal, but that faded in the last two weeks with the index led higher by long duration sectors like Communication Services and REITS. In our opinion, sustaining levels north of ~4200 requires cyclical leadership confirmed by data that implies expansion. US manufacturing and services PMI remained in contraction last month with February flash PMIs due next Tuesday.