Inside Markets — Near Term SPX

Mixed messages inform the near term SPX outlook. The overbought status we referenced for the S&P 500 (SPX) on Friday June 16 was derived from slowed stochastic oscillator that measures price and time. The -2.2% pullback in the SPX through Monday’s close may have started the clock on a move to oversold status, but yesterday’s slate of improved macro data has equities poised to move higher in the near term. The improved growth data temporarily feeds the soft landing narrative that now requires cooperative inflation numbers.  The most immediate inflation numbers arrive this Friday, but the real test comes on Wednesday July 12 with the release of June US CPI. Base effects alone should take YoY headline CPI into the low 3% range, but a stickier core inflation number would derail the soft landing theme and take the SPX into oversold status.

History suggests its wise to remain skeptical about the prospects for an economic soft landing. The Fed has tightened monetary policy at the fastest pace in 40 years. The Fed funds rate is 2x higher than the neutral rate, and US money supply has been shrinking for the last six months. A hard landing or recession seems more likely with these factors in mind, but some suggest the long standing ~2.5% ‘neutral rate’ may actually be higher given assumed productivity benefits from the adoption of generative AI.