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Morning Notes — Outlook and Catalysts

 Outlook and Catalysts

July 22, 2022

SPX: The S&P 500 (SPX) cleared near-term technical resistance in the 3950-3970 range yesterday with a position squeeze potentially postponed as disappointing overnight results in social media/Tech (combined SPX weight of 36%).  The +9% gain off the June 16 low qualifies as a ‘reflex rally’ that occur in all markets when conditions become as oversold as they were in mid-June.  Reflex rallies generally last several weeks and produce gains in the low-mid-double digits. From a technical perspective, the intermediate term is skewed lower until the SPX clears 4150-4200.  Getting through that level will require lower realized inflation and lower terminal Fed expectations.  Terminal Fed expectations remain in the 3.40-3.50% range, which is well above neutral rate estimates of ~2.60-2.65%.  Terminal Fed expectations in the 2.80-2.90% range should be enough to get the SPX through ~4200. Over the past 2 weeks, we’ve seen several inflation data points come in lower than expected, but markets want to see CPI or PCE miss before Fed expectations fall. Depending on the magnitude of the miss, a sub-3% terminal rate expectations number may require two consecutive months of lower CPI/PCE.  The next catalyst will be July CPI released on August 10.

Meanwhile: It’s been encouraging to watch realized equity volatility (VIX) descend back toward neutral since mid-June.  The VIX is up a bit today at 23.70.  We define neutral as 20. Real yields are another item to watch in the background with lower levels taking pressure off multiple compression in growth/Tech sectors.  Ten year real yields are now +44bps, which is just below the 50-day moving average and down from a mid-June high of +89bps. Ten-year real yield levels below +11bps should allow Tech multiples to expand.

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