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Morning Notes — SPX Levels

SPX Levels

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.  

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