October 12, 2022
Near-term SPX: Consensus is looking for headline CPI to come in at +8.1%. Anything north of +8.1% will likely weigh on the SPX with Tech underperforming. Numbers below +8% will drive SPX upside with likely outperformance in Industrials and Consumer Discretionary. A September CPI print at or below +7.8% is probably required to drive the SPX through technical resistance at ~3900. We continue to see strong support in the 3500-handles with a confluence of factors needed for a break lower. Sustaining levels below ~3500 will be difficult without a higher CPI report, poor start to CQ3 earnings season and a spike in oil prices.
Bond yields: The BOE is the focal point for bond yields as the central bank’s temporary Gilt buying program is scheduled to end this Friday. Yesterday, BOE Governor Bailey said the program will end as scheduled, despite emerging narratives around the potential for an extension. The bond buying program temporarily halted the steep backup in yields that followed the new Truss government’s fiscal spending plan amid already high inflation. If inflation is defined as ‘too many pounds chasing too few goods,’ more pounds won’t help matters. There’s a time and a place for everything, and now is not the time for increased fiscal spending. After his formal comments yesterday, Bailey reportedly said ‘policy is now operating in opposite directions.’ The same can be said for US fiscal spending plans signed into law as recently as August in the ironically titled ‘Inflation Reduction Act.’
More: Higher nominal bond yields raise the risk free rate, which lowers the terminal value of all assets. Assets with the highest valuation multiples (Tech/NDX) are the most vulnerable to a high/rising yield environment, particularly when it comes to real yields. The 12-years that followed the GFC were characterized by disinflation, low nominal yields and sometimes negative real yields. That’s the environment that generated premium valuations for secular growth stocks. The highest valuations came when 10-year real yields were below -90bps. Ten-year real yields are now +160bps and Tech is underperforming. Real yields are responding to realized inflation with September CPI due tomorrow.