July 18, 2022
The S&P 500 remains in a narrow range between ~3720-3910. A push above 3950 would still be considered part of a reflex rally that followed extreme oversold conditions. A bullish medium-term technical outlook would follow a break above 4150. In our view, such an event would require lower realized inflation data to result in a repricing of terminal Fed expectations. Terminal Fed expectations remain nearly 100bp above a neutral rate assumption of ~265bp. Friday’s lower than expected Michigan inflation expectations component and Empire prices paid/received for July were the first data points to offer encouragement. The recent low at 3670 should be considered the downside objective with a break resulting in technical support only falling to ~3550 defined by the late ’20 breakout after positive vaccine data.
This week’s decision from Russia on natural gas flows into Europe is the event to watch. A cessation of gas flows into Europe would result in rationing and a likely recession for the region. Currently debated energy price caps on Russian oil has the potential to become a larger global issue if Russia decides to retaliate by halting production. While unlikely (Russia’s main source of revenue), that kind of move would be a substantial supply shock that could take crude oil prices to $200-$350bbl. Absent of these two events happening, we’d expect the global economy to bend and not break in the face of adverse events to date.