Coming week puts Fed's "data dependency" to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.

Tom Lee, CFA
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Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.

Today’s note will include a short video update. We discuss: Fed Chair Powell’s speech last friday at Jackson Hole was constructive to our view, because he emphasized data dependence.  We expect this incoming week to show markets need to calibrate lower their views on inflation and labor market strength.  This should be supportive of stocks (Duration: 9:11).

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.

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HEADS UP: I will be in transit on Monday 8/28 and will not be able to produce a video Monday evening.

This week is the final week of August and perhaps one of the least liquid weeks as many investors head for vacation into Labor Day. There is a significant slate of macro data coming this week, much of which we expect to show both strong disinflationary forces (July PCE) and a softening jobs market (JOLTS and August jobs report). So overall, we anticipate the coming week to lean “dovish” for those economists and investors data dependent (including Fed).

  • Stocks actually rose 1% last week but it felt like a mixed bag overall.
  • Fed Chair Powell’s speech at Jackson Hole, in my view, was actually very constructive and supportive of our view that the Fed and FOMC remain data dependent. And we expect incoming data in coming months to tilt heavily “disinflation” and “softer jobs market”, and the upshot is the Fed is not likely to raise rates again for this cycle. That is, we think probabilities favor no hike in September nor November.
  • But many economists and markets saw a “hawkish” bias in Powell’s speech (even JPMorgan cited their AI-based NLP leaned “hawkish”) but we think this is because “hammers see nails” — meaning, the majority of economists and investors lean hawkish, so their bias is to see hawkish details.
  • Thus, it is not a surprise to us that odds of a September and November hike rose this past week:
    – Sept hike odds rose from 12% to 21%
    – Nov hike odds rose from 30% to 42%
    – Wow.
  • These are certainly eye-opening increases in hike expectations. But the move in US 10-year yields have been far more modest. In fact, in the past week, US 10-year yields fell from 4.25% to 4.23% and as JPMorgan Fixed Income Strategists note, they see yields as fundamentally “rich” (too high) and if incoming data is soft, they see yields falling. That is consistent with our view and we anticipate the same.
  • There is alot of key data coming this week:
    – 8/29 9am ET: June Case-Shiller Home prices <–could be “hawkish”
    – 8/29 10am ET: JOLTS July <– likely soft = dovish
    – 8/30 8:15am ET: ADP Aug jobs <– likely mixed
    – 8/31 8:30am ET: July PCE deflator <– KEY likely soft = dovish
    – 9/1 8:30am ET: August jobs report <– KEY likely soft = dovish
    – 9/1 10am ET: Aug ISM manufacturing <– likely better = neutral
  • There are many key reports next week. But the two that will sway the Fed most, arguably, are the July PCE deflator (inflation) and August NFP jobs report. We think payrolls will be soft and later this week, we will have a fuller view on this. JOLTS matters and we expect this to lean soft.
  • So overall, the cadence of data this week is expected to be softer, which will lean dovish. And the path dependent views will likely course calibrate dovish. We think this will be supportive of stocks.

BOTTOM LINE: While stocks need to demonstrate resilience, we lean overall positive into this week

Our Head of Technical Strategy, Mark Newton, sees equities as still not having proven a sustainable low is in place. And this makes sense given markets have been in a downtrend since July and a key level is around S&P 500 4,460. As shown below, this is the intersection of the 20 dma and 50 dma currently and sits about 55 points above Friday’s close of 4,405.

  • Our view remains constructive as we believe Powell’s speech confirms our view that Fed thinking will tilt dovish if incoming data is dovish, which we expect this week.
  • This means we anticipate odds of a Sept and Nov hike to fall this week, from the current 21% and 42%, respectively. In fact, we expect both to eventually move towards zero.
  • This should be a positive effect on yields (lower) and on equities (higher).
  • But we also know that this is the final week of August, so markets are less liquid.
  • And August is historically a tough month, which we have seen on ample display this month.

That said, while acknowledging the technical hurdles, we lean positive this week. But respecting that this is a volatile week.

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: JPMorgan Economic Research

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: Goldman Sachs Research

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: JPMorgan Fixed Income Research
Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: Fundstrat

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: Bloomberg and Fundstrat

Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Coming week puts Fed's data dependency to path calibration. We expect it to lean more dovish vs consensus = supports positive thesis into year-end. But it's still August.
Source: Fundstrat

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 Tame
  • 8/7 11am ET Manheim Used Vehicle Index July Final Tame
  • 8/10 8:30am ET July CPI Tame
  • 8/11 8:30am ET July PPI Tame
  • 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
  • 8/11 Atlanta Fed Wage Tracker July Tame
  • 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
  • 8/15 10am ET Aug NAHB Housing Market IndexTame
  • 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
  • 8/16 2pm ET FOMC MinutesMixed 
  • 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
  • 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
  • 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
  • 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
  • 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
  • 9/1 8:30am ET August NFP jobs report
  • 9/1 10am ET August ISM Manufacturing

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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35 Granny Shot Ideas: We performed our quarterly rebalance on 7/18. Full stock list here –> Click here

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Tom Lee, CFA
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