February 7, 2023
The focus today is on Fed Chair Powell’s comments at the Economic Club of Washington. Fed rate expectations have repriced higher since Friday’s Jobs Report, but the drawdown in equities thus far has been short and shallow. Markets were concerned that Powell might alter his message today, but early remarks mostly fit with those from last week’s press conference.
A pause in the Fed’s tightening cycle was the most compelling argument in the bullish narrative and the list of reasons to be bearish grows by the hour. Light equity positioning and the tendency for the market to move in the direction that causes maximum pain seem to be at work. All major investor groups underperformed in January and with sidelined cash near records, all pullbacks are viewed as buying opportunities. We see the potential for this to continue until there’s an uptick in realized equity volatility as measured by the VIX index. The pain trade seemed to kick in mid-January when the VIX dipped below 20 and SPX leadership shifted from cyclical sectors to long-duration groups. VIX levels north of 21 would likely derail the current trend with higher terminal rates pressuring the SPX below near-term support at ~4100.
Today’s inflation data featured the first uptick in the Manheim Used Car Index since May. Inflation data elsewhere included hotter than expected Japan wage data. The only other US inflation number this week will be in Friday’s Michigan expectations survey for February, while next week brings five inflation readings including January CPI on Tuesday.