Morning Notes — Inflation and Bond Yields

Inflation: Tomorrow’s July CPI report is the most important inflation catalyst this week, but it’s not the only one.  July PPI will be released Thursday, while Friday brings import/export prices for July and inflation expectations in the August Michigan consumer sentiment survey.  There doesn’t seem to be much anticipation for a lower CPI print tomorrow, with the peak inflation narrative based on cumulative data over the next couple of months.  The next FOMC meeting is more than five weeks away, so a punchy July CPI report shouldn’t completely derail the peak-Fed narrative either.

SPX: The S&P 500 has pulled back from technical resistance in the 4150-4200 range.  Getting through ~4200 will likely require terminal Fed expectations retrace closer to the ~2.50% neutral rate.  Terminal Fed expectations now sit at ~3.59% with levels below ~3% serving as a bullish trigger. While tomorrow’s CPI report is an important catalyst, a single monthly realized inflation miss probably isn’t enough.  Core CPI is the metric to watch with consensus expectations for +0.5% MoM and +6.1% YoY.  There are three Fed officials scheduled to speak tomorrow and Thursday.  We look for consolidation rather than material downside in the event of an upside print.  First level technical support sits in the ~3910-3950 area with stronger secondary support as low as ~3790.

Tech: We look for 10-year Treasury yields to move higher in the weeks ahead. Our medium-term outlook is for something in the 3.10-3.15% range.  Higher nominal yields tend to put pressure on Tech multiples, but there’s a much stronger negative correlation between real yields (nominal yields -inflation expectations) and growth multiples. Ten-year real yields are now at +32bp after holding support at +11bp two weeks ago.  We like the set up for Tech outperformance once real yields break below 11bp.