July 20, 2022
The S&P 500 (SPX) is butting up against intervening resistance in the 3950-3970 range with a breakout likely to result in a position squeeze to ~4100. The SPX has gained +7.7% over the last 4 weeks in what can only be characterized as an oversold reflex rally that even occurs inside longer bear markets. A rally to ~4100 would still fit within the definition of a reflex rally, which often result in mid-double-digit gains. The key technical hurdle is still ~4150 and sustained levels north of ~4200 are required to change the intermediate term technical outlook. Obtaining sustained levels north of ~4200 requires lower terminal Fed rate expectations. Terminal rate (when the tightening cycle ends) expectations currently sit at ~3.50, which is 100bp above most assumptions for neutral interest rates. Markets will want to see terminal Fed expectations (December ’22 Fed fund futures) fall below 3%, which requires lower realized inflation. Longer-run inflation expectations have declined significantly over the last three months and Friday’s first look at July inflation data was encouraging with Michigan inflation expectations and NY Fed prices paid/received both coming in below consensus. But lower terminal Fed expectations and an eventual Fed pivot will require a downshift in CPI and PCE data with July CPI due August 10.