Growth and Inflation
October 11, 2023
An end of the hiking cycle doesn’t mean the tightening cycle is over. Ongoing QT operations by the Fed and increased Treasury issuance are two unchanged factors behind the recent rise in nominal yields. Elevated nominal bond yields and cooling inflation expectations will hold real yields at highly restrictive levels for the foreseeable future. The consumer seems to be in good shape and labor markets remain strong, so this could take a while. But the longer real yields remain restrictive, the greater the probability for something to break. Growth and inflation are basically the same thing over longer periods of time and 10-year real yields of +230bp are near record levels.
Consensus is looking for September headline CPI to come in at +0.3% MoM, down from +0.6% in August. This should put the headline YoY rate at +3.6%, down from +3.7% last month. Core CPI is also expected to come in at +0.3% MoM for a YoY rate of +4.1%, down from +4.3% in August.
We maintain a tactically bearish outlook on the S&P 500 (SPX) with expectations for an eventual break below technical support near 4200. Nearly all major indices are in the midst of a brief relief rally after breaking down from bearish distribution patterns that began in late July. The cyclically-sensitive Russell 2000 (RTY) was the first major index to break support, followed by the equal-weight S&P 500 (SPW) and then EuroStoxx 50 Index (SX5E). The NYSE FANG+ Index (NYFANG) is the only subgroup holding the SPX together at the moment. NYFANG levels below 7175 would lead to accelerated downside momentum in the SPX, while VIX levels north of 22 become a headwind for rally attempts. Resumed weakness in RTY, SPW and SX5E will likely result in more near-term crowding in the NYFANG, which would make an eventual break all the more painful.