February 1, 2023
Monetary factors are at the center of the current market narrative, with equity upside yesterday driven by a weaker-than-expected Employment Cost Index and positioning ahead of today’s Fed meeting. Fed officials have been reiterating the ‘higher-for-longer’ message for several weeks, and yesterday’s advance may partially reflect skepticism that today’s meeting results in incremental understanding of the theme. Yesterday’s surprise consumer confidence miss, steep decline in home prices and today’s weaker ISM manufacturing report point to rapidly deteriorating demand conditions. Unfortunately, monetary tightening can effectively address demand-pull inflation, but does little to combat inflation caused by a supply shock. Remember, the Fed’s primary handbook on cost-push inflation comes from its experience following the 1973 Arab Oil Embargo. And near-term inflation risks remain given the potential for China’s reopening to drive oil and base metal prices higher.
SPX: The S&P 500 (SPX) has recently rallied to strong technical resistance in the 4000-4100 range. We doubt the index will be able to break above that range without a change in macro conditions, specifically a Fed policy pivot. A stubbornly hawkish Fed amid a deteriorating economic backdrop only makes the fundamental landscape more challenging.