August 31, 2023
Systematic funds should be net-buyers of equities given subtle changes in technical conditions. Tuesday’s broad rally resulted in the S&P 500 (SPX) and Nasdaq 100 (NDX) reclaiming their respective 50-day moving averages, which should result in some CTA re-grossing of positions. Volatility targeting strategies should also be active on the buyside given the recent slide in the VIX. And gamma hedging strategies are now off peak short levels, which should help reduce volatility even further in the days ahead.
Pre-Jackson Hole anxiety accounts for the pullback during the first three weeks of August. The passing of the event, regardless of messaging from the event itself was going to remove an overhang on stocks and provide some near-term upside. Yesterday, the SPX managed to close above 4500 since August 7, which effectively erases the pullback associated a potentially hawkish message at Jackson Hole. This week’s JOLTS report, Conference Board survey and ADP private payrolls basically support a view that the Fed has completed the hiking cycle. Today’s data is less convincing with July core PCE and super core PCE remaining at elevated levels as forecasted. This leaves the SPX staring at technical resistance near 4525 with tomorrow’s Jobs Report as the final near-term catalyst capable of pushing the index through. As we’ve noted all week, steepening in the 5/10 yield curve is the key to push the SPX higher and doubt we’ll see the kind of steepening required. The 5/10 yield curve is now -17bp and think we need to see something beyond -5bp to get through near-term resistance. Consensus is looking for non-farm payrolls of +172,000, an Unemployment Rate (UR) of 3.5% and average hourly earnings up +0.3%. Steepening the yield curve beyond -5bp probably requires non-farm payrolls to come in below +90,000, a UR above 3.7% and wage gain of +0.2% or less.