August woes front-loaded. Suggests market can start to rally post-"hot" July jobs report. Array ( [cookie] => bd9938-e3adff-ae2b62-2eef6c-d4d7ee [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 134426 [user_id] => [reason] => Usage under limits [method] => ) 1 and can accesss 1

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Today’s note will include a short video update. We discuss why it is likely August has seen a “front loaded” selloff.  We also worry Friday will see a strong jobs report, but any panic selling there likely marks a buy the dip moment.  This lines up with how markets react after first 3 days and the technical picture outlined by Mark Newton

Please click below to view today’s Macro Minute (Duration: 7:37).

We are 3 days into August and the S&P 500 is already down ~2%. Investors get very wary in August and 2023 is living up to these concerns. However, as much as we entered August wary, a few things suggest to us the selling pressure this year might be “front loaded” for the month. That is, we might already be approaching some turning point:

• As we noted earlier this week, our base case was a drawdown for S&P 500 towards 4,430 to 4,470. Mark Newton wrote that more tactically, he saw an initial near term bottom 4,458 to 4,500 before Tuesday (8/8). And later potentially 4,350 to 4,400 but that is not any long term objective.
• The intraday low Thursday was 4,485 and so this falls within the range that Newton saw and sort of spitting distance to the 4,470. So in a way, this is the level that would make sense to add risk.
• Markets came under pressure from a variety of factors including the Fitch USA sovereign downgrade, the ADP July “hot jobs” print of +324k and general wariness around BoJ central bank action. And these pressured yields higher and the VIX has also moved to 16.
• What gives us any confidence that we are nearing some sort of important low? It is sort of convoluted, but please listen to this rationale.
• First, a wide range of estimates exist for BLS July jobs report, suggesting that markets will be surprised by any figure:
  – consensus is looking for 200k
  – Deep Macro, a respective economic firm using alternative data, sees +84k
  – “Economist whisperer” I frequently use sees STRONG >275k jobs
  – wide divergence
• This means the market will have one of two reactions, but I would recommend only a single action:
  – there is a chance of “panic selling” on a strong July jobs
  – why? because this puts a September hike into play
  – if the July jobs is closer to Deep Macro (a miss)
  – investors are likely to be risk-on
• On either reaction, we think Friday makes sense as the day to start adding risk-on for August. Yes, we would buy that dip. Here is why:
  – while “hot” July job might initially trigger negative reaction
  – July CPI next week likely offsets this. Such was the case in early July
  – Fed has two CPIs and one jobs report, so July not as “game changer” as seems
• Anecdotally, it seems like many nimble institutional investors also flipped bearish in the past week. There are technical factors driving this as well as liquidity dynamics. And it has not helped that August started off so sloppily. But this sudden flip shows few investors have “bought this dip” and this to me suggests there is firepower on the sidelines.

BOTTOM LINE: First 3 days down suggests August sell-off was front loaded. Favors rally post-July jobs.

Our data science team, led by tireless Ken, looked at if there is any impact on August returns based upon the return of the first 3 days:

• Since 1950, when August first 3 days down >-1%:
  – day 4 to month end return +1.2% (60% win-ratio)
• Since 1950, when August first 3 days up > 1%:
  – day 4 to month end return +0.4% (50% win-ratio)
• Since 1950, all years:
  – day 4 to month end return +0.6% (56% win-ratio)

So, it is apparent that the worse the start for August (first 3 days), the better the rest of the month. And this is true when YTD returns >15% into August:

• Since 1950, 15 instances where YTD >15%
• August first 3 days down AND YTD >+15%:
  – day 4 to month end return +0.8% (78% win-ratio)
• August first 3 days up AND YTD >+15%:
  – day 4 to month end return -1.1% (33% win-ratio)

Again, when markets have strong momentum into August (like 2023), the choppier the start to August, the better. For the reasons mentioned above, I see this happening in 2023. So the conclusion is that I think the selling pressure in August is front loaded, so the rest of the month is safer for investors. But this doesn’t mean we drop our wariness.

Below is a simple summary of the reasons we think a sell-off Friday is probably a “buy the dip” moment. And investors have not bought any dips so far this week.

Below is a stylized view of how the next week could play out, in the context of the tactical window outlined by Mark Newton, our Head of Technical Strategy. He sees a possible bottom 8/7 to 8/9. And this would be consistent with the idea that a strong jobs report Friday will trigger some panic selling.

The Street has a wide range of expectations.

• eyeballing, the skew is for softer jobs with many below 200k
• Deep Macro’s estimate is +84k and they are worth paying attention to
• Strong jobs report could panic many

And the obvious things to watch are yields and VIX. Both moved in an unfavorable way this week as surge in yields and surge in VIX are negative for equities:

• so what these do in coming weeks matters

Deep Macro, the economics firm founded by Jeff Young, sees +84k jobs on Friday.

As shown below, they have a good track record of calling the payrolls report.

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report
• 8/7 11am ET Manheim Used Vehicle Index July Final
• 8/10 8:30am ET July CPI
• 8/11 8:30am ET July PPI
• 8/11 10am ET U. Mich. July prelim 1-yr inflation
• 8/11 Atlanta Fed Wage Tracker July
• 8/15 8:30am ET Aug Empire Manufacturing Survey 
• 8/15 10am ET Aug NAHB Housing Market Index
• 8/16 8:30am ET Aug New York Fed Business Activity Survey  
• 8/16 2pm ET FOMC Minutes
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey
• 8/17 Manheim Aug Mid-Month Used Vehicle Value Index
• 8/23 9:45am ET S&P Global PMI Aug Prelim
• 8/25 10am ET Aug Final U Mich 1-yr inflation
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey
• 8/29 9am ET June S&P CoreLogic CS home price
• 8/29 10am ET Aug Conference Board Consumer Confidence
• 8/29 10 am ET Jul JOLTS
• 8/31 8:30am ET July PCE

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 Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 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 Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

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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