July 17, 2023
The Fed has entered its blackout period ahead of the July 26th FOMC meeting, but former Vice Chair Clarida has said it’s reasonable for markets to anticipate a rate cut by next March.
The short-covering rally is now extended with most segments in short-term overbought territory. While there are no signs yet of momentum divergence, reaching overbought status increases the likelihood for a momentum unwind. Also note there’s an NDX rebalance occurring this Friday that could pressure the largest names in the index. The total weight of AAPL, MSFT, GOOGL, AMZN, NVDA and TSLA is now 50.9% with the special rebalancing designed to decrease the aggregated weight to 40%. The rebalance shouldn’t have any direct impact on share prices but could result in increased turnover in these top names.
The S&P 500 (SPX) made a new YTD high following last week’s stepdown in CPI and PPI inflation. We expected a big decline in YoY inflation on base effects alone, but the MoM declines were encouraging as many components reached two-year lows.
The improved inflation data didn’t alter the bond market view on a July rate hike with the probability now sitting at 94%. However, the data did push down the probability for an additional 25bp rate hike, and we expect the July rate hike will be the last one for the cycle. Achieving clarity over the end of the Fed’s hiking cycle should pull yields lower, reduce volatility, tighten credit spreads and boost equity markets. Unfortunately, we don’t expect this will happen next week with a hawkish-leaning Powell press conference meant to reign in market speculation. The next opportunity to gain visibility on an end to the tightening cycle would then fall to the Jackson Hole meeting from August 24 – 26 or the September 20 Fed meeting itself. We expect earnings upgrades once clarity is achieved with investors looking into calendar-’24 where the bottoms-up forecast now sits at $241.30.