Morning Notes — Catalyst Ahead, Technical Levels Identified

June Fed surveys (Empire manufacturing and Philadelphia Fed) that were released last week came in well-ahead of consensus. Economic data from developed markets along with high frequency indicators have continued to show signs of very strong bounce in activity, but the two Fed surveys caught everyone by surprise. The S&P 500 was down ~4.75% during the prior week as increasing coronavirus case counts in a handful of US states attracted attention on concerns for resumed regional restrictions. But Monday’s release of the Empire manufacturing Index completely changed the market focus and Thursday’s release of the Philadelphia Fed survey confirmed the strength in Monday’s report. Regional Fed surveys have a positive correlation to US manufacturing PMI, which has a strong positive correlation to future economic activity. For obvious reasons, regional Fed survey results are fairly volatile and often see wide divergences vs consensus expectations. PMI is also one of the few forward-looking indicators that also focuses on the service sector, which has been harder hit by lockdowns. Consensus is looking for flash US manufacturing PMI of 46, up from 39.8 in May, while non-manufacturing is expected to improve to 44.5 from 37.5.

Chartist: Second wave coronavirus reached a peak on June 11, and while the S&P 500 has recovered most of the decline, it has yet to close the opening gap that day. The gap lower from 3190 to 3120 is now short-term resistance with tomorrow’s release of PMI as the first catalyst to either close the gap or test support at ~3000.

Near-term consideration: June month-end portfolio rebalancing will probably result in equity outflows based on its performance relative to fixed income.