Morning Notes — Soft Landing Scenario

Friday’s inline payroll gain and softer than expected wage number fit the rarely seen soft landing scenario. The narrative also includes an improved global growth outlook and fading supply issues given China’s recent reopening. Periods of elevated inflation almost always start with a supply shock. The Fed’s ‘transitory inflation’ message from early-2021 was mostly based on expectations for the Covid supply shock to fade once economies reopen. The recent decline in core goods prices definitely looks like a fading supply shock, but timing’s everything and the demand consequences from the Fed’s rapid tightening campaign may hit later in the year.  This is why the bond market is pricing 182bp of rate cuts into the 2 year forward curve.

Intraday levels have the S&P 500 (SPX) trading above near-term technical resistance at ~3925.  A close above this level would shift near-term momentum and could skew risk to the upside given short-term oversold conditions, bearish sentiment and light positioning.  Thursday’s CPI report is the catalyst to watch this week with a cooler-than-expected print taking the SPX back toward strong resistance in the 4100-4200 range, which implies +4.3% upside from current levels. Consensus estimates for Thursday’s CPI report aren’t yet available, but we’re looking for YoY headline CPI to fall to +6.5% from 7.1% last month and a core rate of +5.7% vs. 6%. This week also brings speeches from five Fed officials likely to push back on the disinflation narrative given the potential for easier financial conditions to undermine its fight against inflation.