Morning Notes — Closing Levels Matter

Earlier this morning, the S&P 500 briefly traded above the February 19, 2020 intraday record high of 3393.  That’s encouraging but the close is what matters to technicians.  Old highs act as fairly strong technical resistance and we thought the index would run out of momentum on the approach.  That’s been the case and we still place a higher probability on a fade.

New highs in the SPX with cyclical/value sector leadership would give us the most confidence.  Cyclically-sensitive and value sectors tend to work best when bond yields rise and yield curve steepens.  Yesterday, we laid out a scenario where bond yields rise slightly with a more noticeable slope in the curve.  Shorter-data yields should stay more closely anchored to Fed policy.  The September policy meeting is expected to include inflation-based forward guidance with a sustainable inflation target of 2%.  The last report showed core PCE at +0.9% year-over-year, so we don’t see the Fed getting off the zero lower bound for some time.  But longer dated yields have a chance of rising based on expectations for growth, better activity data and Treasury issuance.   The $3T Cares package was mostly financed with T-bills that mature before year-end and the most recent Treasury statement guided to 10-year equivalent supply increasing 40-45% in the last 5 months of 2020.  There’s been nothing to suggest an issue with demand for these bonds, but increasing supply while holding demand constant means lower prices/higher yields.  The Fed is buying Treasuries at a pace of $80B/month, which will only account for about 25% on the Treasury’s issuance.  Enough steepening to give cyclical/value sectors and added tailwind into year end.

Next: The next scheduled catalyst with the requisite weight to deliver new highs in SPX could be Friday’s release of flash August PMIs.  Thursday’s Philadelphia Fed and weekly jobless claims data will be closely followed and we also get more retailer earnings tomorrow morning with LOW and TGT.  Labor Day is Monday September 7, which means the week of 8/31 will be lightly attended.  There won’t be much on the calendar during that week, which tends to lead to trend continuation.