Morning Notes — Cooler July Inflation

The S&P 500 (SPX) is higher after this morning’s cooler CPI print into technical resistance at ~4200.  Old support levels that break tend to make strong resistance on recoveries with the 4150-4200 range holding until late-April.  The ~4235 level also defines the 50% retracement objective off the bottom and 61.8% retracement from the peak.  Market technicians will likely require a sustained break above ~4235 before calling a turn in the intermediate trend.  These Fibonacci levels are also popular long/short triggers for systematic funds (CTAs etc.) that represent a meaningful share of volume.

Evolution: Terminal Fed rate expectations have been the dominant cross market influence on equities for several months. The dominant influence on terminal Fed expectations is realized inflation data, making today’s cooler CPI print an important bullish development. Terminal Fed expectations are only down -6bp on today’s data to 3.53% and we continue to expect equity rallies will be capped until expectations move closer to the neutral rate of ~2.50%. Cross market influence is always evolving and dominant relationships tend to be ephemeral. It’s possible that last Friday’s stronger than expected Jobs Report could be driving the perception of the neutral rate higher, allowing greater tolerance of current terminal Fed expectations. Terminal Fed expectations at/below 3% still look like the obvious trigger for the S&P 500 to clear technical resistance at ~4235. But given the dynamic nature of markets, its possible that something below ~3.35% could now be enough. Either way, we expect more consolidation in the SPX or more cooling in realized inflation data is required. Tomorrow’s July PPI report is the next realized inflation catalyst on the calendar.