Morning Notes — Short-Term Technical Hurdle

Telephone: Aggregate Q2 management commentary on the state of the US consumer suggests some weakening in lower income consumers, but mostly just to normal, pre-pandemic levels.  Today’s AT&T (T) comment: “we’re seeing an increase in bad debt to slightly higher than pre-pandemic levels, as well as extended cash collection cycles. However, it’s important to note that customers are making their accounts today consistent with historical patterns and previous economic cycles.” While that sounds incrementally negative, it’s important to acknowledge that mobile carriers lowered their credit standards over the last ~2 years to drive subscriber growth.

Voodoo: The S&P 500 (SPX) is currently trading just above short-term technical resistance in the 3950-3970 range, but the close is all that matters.  Short-covering over the past two sessions has helped the SPX get to this point and we expect a further position squeeze to ~4100 on a close above ~3970.  The 4150-4200 range represents strong technical resistance, with a breakout requiring a shift in macro fundamentals, specifically lower realized inflation and a lower expected terminal Fed rate.  The next major inflation catalyst will be July CPI, reported August 10.

Witchcraft: Terminal Fed expectations currently sit at ~3.50% and it will likely take something below 3% to push the SPX through 4150.  We expect it will take more than one realized inflation miss to generate a number below 3%, which moves the timeline into early-September. This also matches our expectation for out-year downside earnings revisions to act as a clearing event and the potential for Sept/Oct to be un-seasonably strong.