We are watching 3 things this week. At top of list is Middle East conflict.

VIDEO: There are 3 things we are watching closely this week. At the top of the list is a potential imminent attack by Iran on Israel

Please click below to view our Macro Minute (duration: 4:51)

Probabilities favor that the worst is behind us for August. That is, the S&P 500 fell to 5,119 on August 5th (close 5,344 on Friday 8/9) and this is likely the low for Summer (August to October). This does not mean markets go straight up, as bottoms are a process. Mark Newton, Head of Technical Strategy, also sees the probabilities this way until at least mid-September.

• There are 3 things that are top of mind for this week:
  – Iran potentially attacks Israel in coming days
  – July Core CPI released on Wed 8/14 at 8:30am ET
  – Watching the VIX as bottoms are a process
• The most serious and with the most variable outcomes is the imminent attack. There are widespread media reports that Iran plans to launch a direct attack soon (X.com). And there are also media reports that Washington is trying to stave off such an attack. The WSJ.com reports that the US has warned of severe economic consequences and resulting escalation to Iran if such an attack takes place.
• The obvious implication of an attack is that equities become “risk-off” as investors wait for clarity of the scope of the resulting conflict expansion. Watching the VIX will be the easiest proxy.
  – the VIX closed at 24 on Friday
  – the recent high was 67 in early August
  – we doubt the VIX will surge back to those highs
  – when VIX closes below 20, it is a sign of “relief”
• The impact on equities from an Iran attack is just not something we can model ahead of the event. And this means investors need to be wary and mindful that this will be a “high velocity” impact on markets. And as more clarity becomes available, we can provide better guidance.
• There is a lot of important macro economic data released this week:
  – 8/12 Mon 11:00 AM ET: Jul NY Fed 1yr Inf Exp
  – 8/13 Tue 6:00 AM ET: Jul Small Business Optimism Survey    92e
  – 8/13 Tue 8:30 AM ET: Jul Core PPI    0.14%e
  – 8/14 Wed 8:30 AM ET: Jul Core CPI    0.19%e
  – 8/15 Thu 8:30 AM ET: Jul Retail Sales    0.3%e
  – 8/15 Thu 8:30 AM ET: Aug Empire Manufacturing Survey    -6.0e
  – 8/15 Thu 8:30 AM ET: Aug Philly Fed Business Outlook    7.0e
  – 8/15 Thu 10:00 AM ET: Aug NAHB Housing Market Index
  – 8/15 Thu 4:00 PM ET: Jun Net TIC Flows
  – 8/16 Fri 10:00 AM ET: Aug P U. Mich. 1yr Inf Exp
• Of these, we view July Core CPI as the most critical. This is released Wed am at 8:30am ET.
  – Street consensus is +0.19% MoM
  – Last 3 Core CPI readings super “soft”
  – April, May, June –> +0.29%, +0.16% and +0.06%
• Arguably, anything below +0.25% is very good. Why? Because Core CPI between November to March averaged >0.30% MoM. Thus, even a +0.25% would be a 4th core inflation reading that broke below the trends of 2022-2023.
• The details is what matters, so we will have a fuller preview as we get closer to Wednesday. But our view remains that inflation is falling like a rock. And auto insurance and shelter are the two components keeping inflation readings high.
• Over the weekend, Miki Bowman, Fed governer spoke hawkishly. And she is not confident that sufficient evidence is in place for a rate cut (X.com):
  – Bowman: “I am not confident that inflation will decline in the same way as in the second half of last year.”
• Her view is the latest example of a Fed using “data dependence” and at important turning points, this is a liability. There are also many investors still “hawkish” on inflation, so her view is not alone. But this is the reason we believe Wed’s July Core CPI is important. This will likely sway some views from hawks “data dependent” for forward looking.
• As we noted in recent notes, bottoms are a process. And we think the easiest proxy to watch is the VIX. When the spot VIX falls below 20 and the VIX futures curve (1M less 4M) “uninverts” we view this as a market fully pricing in the “worst is behind us.”
• But the bottom will have already been in place by then. Barring a serious escalation of the Middle East (not known), this is the case. But keep in mind, bottoms are a process.

BOTTOM LINE: Evidence growing that equities made their summer lows on 8/5.

Generally, August to October is a tough period for markets. One important client, ES of NY, has repeatedly mentioned to me “I never make money in August.” And that is consistent with Mark Newton, Head of Technical Strategy, view that Aug to Oct is window where stocks risk/reward is less attractive than the period post-election.

• Since 1950, however, of that period between August to October, the S&P 500 has bottomed most commonly during August.
  – August, Sept and Oct low %: 44%, 17%, 40%
  – meaning, markets most likely bottom in August (for that period)
• Guess what is the most common week for the bottom?
  – the first week of August
  – 15 of the 74 years
• Lastly, we need to be mindful that Iran could launch an attack this week, in response to several high profile assassinations. The Olympics continue to August 11. So, markets are naturally wary of the headline risk from this. But we know the adage:
  – “sell the build-up, buy the invasion”
• The only thing is that at the start of the Russia-Ukraine war, markets had a short relief rally. But that war has since become a larger and most costly conflict. So, problems perculating in the Middle East are not to be taken lightly.

• But just because markets might have some headwinds near term does not change the probabilities of a strong second half. As we noted previously:
  – Since 1950, when S&P 500 is up >10% in the first half
  – 23 instances
  – 2H (second half) gains +9.8%, 83% win-ratio
  – the 4 negative 2H instances were 1975, 1983, 1986, 1987
  – essentially, all the negative 2H were during Volcker era

Bottom line, markets are certainly showing strong signs of gaining their footing. And we also view this panic as ultimately being a growth scare (coupled with a carry trade unwind).

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Key incoming data August 2024:

• 8/1 8:30 AM ET: 2Q P Nonfarm Productivity Tame
• 8/1 8:30 AM ET: 2Q P Unit Labor Costs Tame
• 8/1 9:45 AM ET: Jul F S&P Global Manufacturing PMI Tame
• 8/1 10:00 AM ET: Jul ISM Manufacturing PMI Tame
• 8/2 8:30 AM ET: Jul Jobs Report Tame
• 8/2 10:00 AM ET: Jun F Durable Goods Orders Tame
• 8/5 9:45 AM ET: Jul F S&P Global Services PMI Tame
• 8/5 10:00 AM ET: Jul ISM Services PMI Tame
• 8/6 8:30 AM ET: Jun Trade Balance Tame
• 8/7 9:00 AM ET: Jul F Manheim Used vehicle Index Mixed
• 8/12 11:00 AM ET: Jul NY Fed 1yr Inf Exp
• 8/13 6:00 AM ET: Jul Small Business Optimism Survey
• 8/13 8:30 AM ET: Jul PPI
• 8/14 8:30 AM ET: Jul CPI
• 8/15 8:30 AM ET: Jul Retail Sales Data
• 8/15 8:30 AM ET: Aug Empire Manufacturing Survey
• 8/15 8:30 AM ET: Aug Philly Fed Business Outlook
• 8/15 10:00 AM ET: Aug NAHB Housing Market Index
• 8/15 4:00 PM ET: Jun Net TIC Flows
• 8/16 10:00 AM ET: Aug P U. Mich. Sentiment and Inflation Expectation
• 8/19 9:00 AM ET: Aug M Manheim Used vehicle index
• 8/21 2:00 PM ET: Jul FOMC Meeting Minutes
• 8/22 8:30 AM ET: Jul Chicago Fed Nat Activity Index
• 8/22 9:45 AM ET: Aug P S&P Global Manufacturing PMI
• 8/22 9:45 AM ET: Aug P S&P Global Services PMI
• 8/22 10:00 AM ET: Jul Existing Home Sales
• 8/23 10:00 AM ET: Jul New Home Sales
• 8/26 10:00 AM ET: Jul P Durable Goods Orders
• 8/26 10:30 AM ET: Aug Dallas Fed Manuf. Activity Survey
• 8/27 9:00 AM ET: Jun S&P CoreLogic CS home price
• 8/27 10:00 AM ET: Aug Conference Board Consumer Confidence
• 8/29 8:30 AM ET: 2Q S 2024 GDP
• 8/30 8:30 AM ET: Jul PCE Deflator
• 8/30 10:00 AM ET: Aug F U. Mich. Sentiment and Inflation Expectation

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: