August 30, 2022
SPX: The path of least resistance has been lower since the S&P 500 failed to break through the 200-day moving average (popular CTA trigger) at 4320. Note that the 200-day moving average is downward sloping, which has taken the goal posts down to ~4300. Light attendance and thin volume during the last two weeks of August tends to increase volatility/reduce signal quality, but fairly strong technical support still sits in the 3900-3940 range.
Catalysts: The next major inflation-related catalyst will be the August Jobs Report due Friday morning. The Fed has been clear that it wants to see some softness emerge in labor markets, so bad news should be good for equity markets. Consensus is looking for: 1) +300,000 payroll adds vs. 528,000 in July; 2) unchanged Unemployment Rate of 3.5% and; 3) average hourly earnings of +0.4% vs. +0.5% last month. Other catalysts include: 1) Powell speaks next Thursday 9/8; 2) August CPI is due on Tuesday 9/13 and; 3) the FOMC meeting is on Wednesday 9/21. Market expectations are for the 9/21 meeting to bring the final outsized rate hike of 50bp-75bp with the tightening cycle ending after two-25bp hikes in November and December.
Bond yields: Treasury prices reached extreme overbought levels in late July when 10-year yields reached ~2.58%. A mean reversion trade has resulted in 10-year yields reaching our near-term objective in the 3.10-3.15% range. We see this level as the top end unless Friday’s Non-farm payrolls materially exceed +300,000.