TACTICAL BUY: Expect rally in S&P 500 +100 points (>4,500) post-June CPI on 7/12 as we see high probability of Core CPI undershooting consensus.

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Today’s note will include a short video update. We discuss why we are issuing a trading buy for S&P 500, looking for a 100 point gain within the next 5 days.  It is on the expectation of a light core CPI reading of +0.25% or better and would reverse the “higher for longer” Fed priced in last week. Please click to view. (Duration: 6:34).

For the first time this year, we are issuing a short-term tactical buy call on the S&P 500. What this means is we expect the index to rally >100 points in the next week, reaching 4,500 or better, the highest level since April 2022. We do not typically issue such short term tactical calls, but given the softness of markets following the ADP and BLS jobs report, we think the timing makes sense.

• The catalyst is our expectation that June Core CPI undershoots the consensus estimate of +0.30%, with an actual print of +0.25% MoM or lower. The BLS (Bureau of Labor Statistics) will release the June CPI report on 7/12 (Wed).
• What would drive a downside read? The two primary drivers for the downside read is used cars (which should reverse 2 consecutive months of +50% annualized CPI rise) and seasonal adjustment factors that likely push lower Core CPI for June and July (Goldman Sachs’ Economists wrote about this recently, see below). But this is consistent with prior analysis done by our data science team, led by “tireless Ken” that shows 42% of CPI components (by weight) are in outright deflation vs 38% 10-yr avg and 30% 50-yr avg.
• For economists, a low-side Core CPI MoM is a surprise:
  – core CPI of +0.25% MoM is lowest reading since August 2021
  – that is nearly a 2-year low
  – core CPI reading taking place while Shelter runs at +0.55% or higher (6.5% YoY rate)
• For markets, a low-side Core CPI MoM is a positive surprise:
  – undermines the “higher for longer” view of Fed policy
  – likely would put downside pressure on short-term rates
  – ST rates currently reflect “higher for longer”
  – the “bear market rally” camp likely suffers a major loss
• Given the negative market reaction to the jobs data in the past week (ADP and BLS), we think investors have shifted towards a “hawkish Fed” view, and a “higher for longer” which is reflected in the rise in yields. So, the idea of a tactical re-think from a light CPI report would make sense.

BOTTOM LINE: TACTICAL BUY IN PLACE UNTIL 7/14/22

This “tactical buy” is in place until July 14th, and we expect to see a 100 point rally. We do not issue such short term tactical calls, but given the softness of markets following the ADP and BLS jobs report, we think the timing makes sense.

• Why do we think 100 points, or +2.25% is possible?
• As we noted above, we think investors got very bearish and “Fed hawkish” following the jobs data last week. Granted, the labor market is strong, but as we noted, the wage pressures were less intense. And moreover, the acid test is the June CPI report.
• If our view is correct, there will be a rapid re-assessment of views, which drives this upside.
• If S&P 500 rallies towards 4,505, this would also represent a key technical level. This is a 76% retracement of the entire bear market decline from 4,819 (1/4/22) to 3,491 (10/13/22). And essentially the highest closing price since April 2022. To me, this would essentially shatter the bear market thesis.
• What if the CPI is a miss? And it is worse than expected. This is a possibility and this is arguably what consensus is leaning towards after the strong jobs print. As such, the rally would not take place. And we would know this by Wed am.
• But a downside move in equities here would not impair the full year thesis. After all, these CPI reports are backwards looking and we know inflation around housing is far lower. But this doesn’t mean CPI for June has to reflect this.
  

ECONOMIC CALENDAR: FOMC key in July

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final
• 7/12 8:30am ET June CPI
• 7/13 8:30am ET June PPI
• 7/14 Atlanta Fed Wage Tracker June
• 7/14 10am ET U. Mich. June prelim 1-yr inflation
• 7/15 Manheim Mid-Month Used Vehicle Value Index July
• 7/25 9am ET May S&P CoreLogic CS home price
• 7/25 10am ET July Conference Board Consumer Confidence
• 7/26 2pm ET July FOMC rates decision
• 7/28 8:30am ET June PCE
• 7/28 10am ET July Final U Mich 1-yr inflation

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

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