Morning Notes — October CPI

A cooler than expected October CPI report in mid-November caused the unwinding of a crowded macro trade that was short Treasury duration and long USD. The unwind resulted in lower bond yields and dollar weakness, which eased financial conditions, taking the S&P 500 (SPX) to our predetermined resistance level of ~4100. That level contains a handful of significant technical hurdles including the 200-day moving average, 12 month Volume Weighted Average Price (VWAP) for the SPY and the downward sloping channel that has contained the bear market all year. Normally, Friday’s hotter than expected Jobs Report would have caused dollar strength and equity weakness, but hedge funds, faced with year-end P&L pressures used the print as an opportunity to further unwind crowded macro positioning. The single-day positioning anomaly on Friday resulted in dollar weakness and the SPX closing just barely above it’s 200-day moving average.  Unfortunately, a narrow, single-session break above resistance doesn’t qualify as a breakout and resistance at ~4100 remains very much intact. Friday’s hotter Jobs Report and yesterday’s upside ISM services print puts upside risk on the median ’23 dot into next week’s Fed meeting. Prior to these two reports, consensus was looking for the median ’23 dot to come in at ~4.875%, but there’s now concern this could rise to 5.125%. The S&P 500 has been highly sensitive to changes in terminal rate expectations since mid-April and a higher median dot would put upward pressure on terminal rates/downward pressure on the SPX. For the moment, terminal rates remain below 5% because a softer CPI report next Tuesday has potential to be the deciding factor going into Wednesday’s Fed decision and updated dot plot.  Near-term technical support sits at ~3900. Closing levels below 3900 increase the probability to retest lows in the 3500s.