June 2, 2023
The upside in equity markets this week can partially be attributed to a string of disinflationary reports including cooler than expected Eurozone CPI and the large drop in ISM prices paid. Today’s Jobs Report, South Korea CPI and UN food price index add to the emerging disinflation narrative. The rally in equities is also attributed to growing expectations for a Fed pause and reports suggesting that China is preparing a ‘basket of measures’ to bolster the country’s real estate market. Expectations for a pause took a step forward yesterday when perceived Fed hawk Bullard said that monetary policy is now at the low end of sufficiently restrictive territory.
Broad sector participation during this two day rally is an encouraging development as the S&P 500 approaches the August high of ~4305. Yesterday’s rally was supported by positive flows that started in the futures market during trading hours. This may have contributed to broadening leadership and participation from underperforming sectors such as REITS. Rally participation of former laggards occurs from oversold levels and a shift in leadership often contributes to performance chasing. We were surprised by the push through 4200 and would be equally surprised if the index is able to escape the peak from last summer. The emerging disinflation narrative may need to accelerate for the SPX to push higher given that the index is more than 2 standard deviations overbought relative to Fed rate expectations.