In 2023, Equities moved <1% (5D) in 4 of 4 FOMC meetings. July rate decision likely driving more sizable reaction, watch Nov FF futures odds of a hike.

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Today’s note will include a short video update. We discuss:  Markets wobbled last week and concerns of a correction growing. There are many fundamental catalysts this week that drive tactical impacts, the most important being July FOMC decision Wed.  We discuss why the market’s reaction likely huge Wed.

Please click below to view yesterday’s Macro Minute (Duration: 5:33).

There are 3 significant market events this week: (i) 3 of the FAANGs report this week; (ii) Wed is FOMC rate decision day and (iii) Friday is June PCE deflator. Of course, there are other events, and of all these, the key is the July Fed FOMC decision:

• The S&P 500 moved <1% (5-day) on each of the 4 Fed decisions in 2023. So one might wonder why July FOMC would trigger a significant market move.
• In 2022, the S&P 500 saw sharp reactions to the FOMC rate decisions with 5D change of -6% to +6%. We think a greater than 1% move will take place post July FOMC decision.
• There are 3 reasons we see a sharper equity reaction ensuing, even as +25bp for July baked in:
  – first, Fed likely signals a “skip” for September.
  – second, starts to see “light at end of hike tunnel” if there are only 1-2 more hikes
  – third, Fed likely will not push back hard against equity market gains YTD
• Of course, there are reasons the Fed could make hawkish statements:
  – US economic data is strengthening
  – depending on the outcome of these labor negotiations, Fed could worry about wage inflation
  – Fed wants to keep optionality
• While the June CPI was a positive surprise, the data dependency of Fed means the Fed would need to see repeatable positive CPI surprises, before future hikes are taken off the table.
  – that said, 2023 core PCE is tracking below the Fed summary projections
  – FOMC SEP sees 3.9% Core PCE YoY
  – Street consensus sees it at 3.7% YoY by YE 2023
  – Goldman Sachs economists see an even lower 3.6%
• The obvious thing to watch is Fed funds futures. And in particular, the November hike probabilities:
  – currently, odds of a +25bp hike in Nov stand at 19.7%
  – this fell to 16.5% after June CPI
  – the press conference will influence this
• 3 of the 8 FAANG report this week as well. This will further amplify market movements:
  – 7/25: GOOG 0.34%  + MSFT 0.58%  after the close
  – 7/26: META 0.75%  after the close
• Given the “spooky” reaction to NFLX -0.58%  and TSLA 3.29%  earnings, we can be sure markets are on edge.

BOTTOM LINE: Be ready to buy a dip, but we still see any correction as shallow

Many sane investors logically say the S&P 500 is due for a correction of 5% to 10%. And Mark Newton, our Head of Technical Strategy, warns that signs are growing that such an event could happen.

• There has been a deterioration of market internals in the past week, but we believe it is too early to declare a local top is in place.
• The fundamental impact of the July FOMC rate decision is just too significant to ignore, so we are watching markets on Wed post-FOMC. That is after 2pm ET.
• Additionally, 3 of 8 FAANG reporting will have an impact on markets.
• The wise thing is for markets to be wary into Wednesday. The market reaction to the FOMC press conference is just too important.

As we noted above, the key is watching the November Fed funds futures contract. This is the probability of a +25bp rate hike:

• currently, this stands at +19.7%
• this fell to 8.8% after June CPI
• and was 35% after ADP jobs report

Our best guess is this probability will fall after the July FOMC press conference.

Goldman Sachs economists believe July will be the last Fed hike of the cycle.

Fed FOMC summary economic projections show the members saw inflation expectations higher by June vs start of year. But data since June have changed market views.

Consensus now sees core PCE inflation at 3.7% versus Fed 3.9% median view.

Lastly, 3 of 8 FAANG report this week.

Key incoming data July

• 7/3 10am ET June ISM ManufacturingTame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM ServicesTame
• 7/6 10 am ET May JOLTSTame
• 7/7 8:30am ET June Jobs reportMixed
• 7/10 11am ET Manheim Used Vehicle Index June FinalTame
• 7/12 8:30am ET June CPITame
• 7/13 8:30am ET June PPITame
• 7/13 Atlanta Fed Wage Tracker JuneTame
• 7/14 10am ET U. Mich. June prelim 1-yr inflationMixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Indexin-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 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 ManufacturingTame
• 6/2 8:30am ET May Jobs reportTame
• 6/5 10am ET May ISM ServicesTame
• 6/7 Manheim Used Vehicle Value Index MayTame
• 6/9 Atlanta Fed Wage Tracker AprilTame
• 6/13 8:30am ET May CPITame
• 6/14 8:30am ET May PPITame
• 6/14 2pm ET April FOMC rates decisionTame
• 6/16 10am ET U. Mich. May prelim 1-yr inflationTame
• 6/27 9am ET April S&P CoreLogic CS home priceTame
• 6/27 10am ET June Conference Board Consumer ConfidenceTame
• 6/30 8:30am ET May PCETame
• 6/30 10am ET June Final U Mich 1-yr inflationTame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up)Positive inflection
• 5/2 10am ET Mar JOLTSSofter than consensus
• 5/3 10am ET April ISM ServicesTame
• 5/3 2pm Fed May FOMC rates decisionDovish
• 5/5 8:30am ET April Jobs reportTame
• 5/5 Manheim Used Vehicle Value Index AprilTame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion SurveyBetter than feared
• 5/10 8:30am ET April CPITame
• 5/11 8:30am ET April PPITame
• 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 minutesDovish
• 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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