July 13, 2023
It’s possible that central banks may be underestimating the potential pace of global disinflation. The last major disinflationary cycle started with modest China PPI deflation and slow US money supply growth. China is now experiencing fairly rapid PPI deflation with the June print -5.4% YoY, and US money supply is in outright contraction. These two forces will likely put accelerating downward pressure on input costs.
The disinflation in this week’s CPI and PPI reports is unlikely to discourage the Fed to remain on hold at the July meeting. But it should be enough to end the hiking cycle after a July rate hike. While the easy part of the equity rally is likely behind us, an apparent end of the hiking cycle should allow stocks to grind higher as investors look to the Fed’s Jackson Hole event in late August for confirmation. Near-term technical resistance for the SPX sits in the 4515-4565 range, where we expect the rally will, at least pause. The early market reaction to Q2 earnings season will be important in determining whether technical resistance levels hold. Note that this is the time of year when investors generally shift their attention to forward year earnings estimates. CQ2 earnings season is expected to represent the end of the earnings recession with consensus looking for a -7.2% YoY decline before rebounding to +0.8% in Q3 and +8.5% in Q4.