July 5, 2023
The soft landing narrative is challenged as weaker factory orders number lead to the first downtick in the US Economic Surprise Index (ESI) in nearly two weeks. The growth side of the soft landing narrative will be tested again over the next two days with services ISM tomorrow and the June Jobs Report on Friday. An economic soft landing is very difficult to engineer and the deep yield curve inversion is telling you to remain skeptical. After the recent rally, a challenge to the soft landing narrative would likely result in near-term downside for the S&P 500 (SPX). Note that the deep curve inversion doesn’t measure the severity of the downturn and equity markets have a history of looking through recessions that are perceived to be short or shallow.
Supportive macro data would likely generate further upside, but an overbought SPX will struggle to get through resistance near 4535. Subdued implied equity volatility as measured by the VIX Index has been a tailwind for the recent rally. The VIX currently sits in the low teens and levels below 20 will cushion the SPX on pullbacks, while a spike above 22 would challenge technical support near 4200.