Morning Notes — SPX Resistance into Inflation Data

Jobs: With inflation and Fed policy in focus, equity markets would prefer that tomorrow’s Jobs Report come in weaker rather than stronger.  Roughly two-thirds of core inflation comes from wages and the compression of labor income is considered the only lasting source of disinflation.  As noted above, we haven’t quite reached the disinflationary threshold yet on weekly jobless claims.  The key disinflationary level on payroll adds in tomorrow’s Jobs Report is about +100,000.  Consensus is looking for +250,000, which is down from +372,000 last month.  Something below +100,000 would help equities advance a bit further with the S&P 500 (SPX) likely challenging the 4150-4200 zone.  A payroll number north of +400,000 would likely see bond yields reprice higher and the SPX consolidate at lower levels near 3910-3950.

Pivot: The Fed is in a tough spot given its dual mandate to control inflation and maximize employment.  Equity performance and terminal Fed expectations have had a strong negative correlation since early May on worries of a rate-hike induced recession.  The key then for equities to move higher is a lower terminal Fed rate; something below 3% vs. ~3.45% currently.

SPX: The S&P 500 has been able to rally into technical resistance at 4150-4200 based on slower growth and lower inflation in survey data only. Most of the move off the ~3670 low has come from short covering as levered investors re-assess the macro environment. Aggregate data on equity long/short funds and systematic strategies (CTAs etc.) show long positioning remains at extreme lows.  Note, a number of popular CTA buy triggers are located just north of 4220.  Long-only Portfolio Managers are also sitting on large cash balances and have been reluctant buyers during the rally as they wait for realized inflation data to inflect lower.  Tomorrow’s Jobs Report and next Wednesday’s CPI print are the catalysts to watch.