June 22, 2023
Tomorrow brings flash PMIs for June which will provide incremental guidance on the growth outlook. Expectations are for US flash manufacturing PMI to remain in contraction at 48.5, but recent strength in cyclical equity sectors may be signaling a higher print. A flash manufacturing PMI number of 51 seems more likely than 48, and anything north of 50 will take the SPX higher by validating the recent move in homebuilders, semis and transports. Still, the market seems more interested in inflation data given the recent rise in Fed rate expectations. Next Friday brings two important inflation prints including May PCE and June University of Michigan inflation expectations.
The S&P 500 reached overbought levels last Friday and has spent the last three sessions consolidating gains. The pace of recent gains almost requires a period of consolidation ahead of the next set of catalysts. The SPX is down only -1.4% over the last three sessions and a ‘healthy consolidation’ can take the index down another -3.9% to 4195. A break below 4195 or a spike in implied volatility would signal further downside. Subdued equity volatility played an important role in the late-May break above 4195. Low implied equity volatility usually provides a tailwind for equity rallies. The CBOE Volatility Index (VIX) presently sits at non-threatening levels below 14. VIX levels north of 22 are generally considered a headwind for rally attempts and skew risk/reward to the downside.