Morning Notes — Catalysts Ahead

Several catalysts ahead, though quiet in terms of earnings until CQ3 earnings season kicks off next Friday.  Pre-open results from AYI result in upside after the company reported stronger EPS, revenue with improved FY’23 guidance. SGH is the only company reporting after the close.

SPX: Deeply oversold conditions, light equity positioning and some encouraging inflation data have resulted in a +6.5% SPX rally off Friday’s low.  While the bounce is encouraging, we have yet to see the type of momentum divergence or capitulation based selling that often precedes a reflex rally of 10-15%. Yesterday’s rally was primarily driven by sharply lower terminal rate expectations in a response to small fiscal concessions by the UK government and weakness in the employment component of the ISM manufacturing report.  Terminal rate expectations are up 2.5bps today to 4.47%, but anything under 4.5% should allow incremental unwinding of deeply oversold conditions.  Strong technical support remains in the 3500s with a capitulatory bottoming scenario likely resulting in only an intraday break below 3500 before reversing. With light equity positioning and extreme bearish sentiment, we don’t expect the SPX will be able to sustain levels below ~3510 for very long. Technical resistance sits at ~3900 and expect that to hold unless there’s a material shift in the macro fundamental outlook.

Next: This Friday’s Jobs Report and next Thursday’s September CPI print have the necessary density to shift the macro fundamental outlook. Consensus is looking for non-farm payroll adds of +250,000 vs. +315,000 in August and an unchanged Unemployment Rate of 3.7%.  Payroll adds in the 50,000-200,000 range, a slightly higher UR, higher participation rate and lower than expected wage gains would be considered bullish developments for equities. Headline CPI for September is expected to increase +8.1% YoY vs. +8.3% last month.