Morning Notes — Recovery Signal

Recovery signal appears in markets, despite a mixed session for U.S. equities after the S&P 500 gained +5.8% over the last two sessions.

Narrative: Outsized gains over the past two sessions followed a weaker employment component in ISM manufacturing (Monday) and sharp decline in JOLTs job openings (yesterday).  Fed officials have been looking for signs of softening in labor markets with this week’s data driving hope for an eventual Fed pause and pivot. Importantly, the -10.0% drop in August job openings is aligned with the Fed’s goal of easing tight labor markets without a spike in unemployment. Aggregate August JOLTs job openings of ~10M remain well above pre-pandemic levels, but the market will react positively to any signs that labor markets are becoming less tight. Further signs of easing inflation are needed before the peak-Fed narrative becomes widely accepted, and next Thursday’s (10/13) CPI report is the key event on the calendar. Consensus is still looking for a hot headline CPI print of +8.1%.

SPX: Yesterday’s closing levels finally triggered momentum divergence signals that precede a recovery from deeply oversold levels that match those from mid-June. These signals give us more confidence that a 10-15% reflex rally is underway. A 10-15% rally from Friday’s low lines up with fairly strong technical resistance in the 4150-4200 range. That level seems to be the most likely Q4 objective notwithstanding an improvement in macro fundamentals, specifically lower realized inflation and eventual Fed policy normalization. Fed policy normalization will be preceded by lower terminal rate expectations. For this reason, the S&P 500 continues to take near-term directional cues from terminal rate expectations with levels below 4.5% providing further upside. Terminal rate expectations are up +3.3bp following today’s ISM services report to 4.498%.