Wed, August 14, 2024 | 7:50AM ET

While bottoms are a "process," a good July Core CPI tilts "risk-on" at least until Jackson Hole (8/22-8/24)

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Tom Lee, CFA ^AC

Head of Research

While bottoms are a process, a good July Core CPI tilts risk-on at least until Jackson Hole (8/22-8/24)

VIDEO: A good July Core CPI (<+0.25% MoM) might tilt markets to risk-on at least thru the Jackson Hole Economic Symposium 8/23

Please click below to view our Macro Minute (duration: 5:07)

There have been incremental positive developments in the past 24 hours (discussed below) which increase the probabilities that a good July Core CPI print (<+0.25% MoM) today tilts equity markets to “risk-on” until at least the Jackson Hole Economic Symposium (8/22):

The incremental developments are as follows:
– Iran war risks pushed out (“cease fire”?)
– normalization of VIX <20 and VIX term structure
– Yen carry trade panic subsiding
– and now need a “good” July Core CPI < +0.25% MoM

This idea of risk-on until Jackson Hole might sound too obvious. But let me explain the rationale for why July Core CPI matters:
– July Core PPI released Tuesday showing -0.05% MoM, below Street +0.19%
– the higher gasoline hitting headline baked in (for CPI)
– latest confirmation inflation “falling like a rock”
– FINRA margin debt shows little increase in June + July
– markets been de-risking for some time now
In fact, the pattern for FINRA margin debt the last 2 months is the opposite of the massive de-leveraging seen July ’23 to Oct ’23 when S&P 500 fell -11%. At $811 billion (latest), this figure still sits way below the $936 billion of Oct 2021. So, we see this as further affirmation that a major top has not been established.
Street consensus is looking for a July Core CPI of +0.19% MoM. This is already a great number if achieved and would be the 4th “very soft” Core CPI reading. In fact, April, May and June were already running below 2.5% annualized essentially. So, this would be solidifying the arguable trend in inflation, especially compared to the high reading Nov to March 2024.
The sticky components in Core remain shelter and auto insurance. So, we will be watching these 2 pieces especially. And to recap:
– Of the +1.4% excess Core CPI YoY,
– Shelter and auto insurance are +1.60% of the excess
– Ex-those two, Core CPI YoY is +0.7%, below 1.4% long-term avg
Lastly, recall there was a lot of talk of systematic financial risks last week. The doomsayers were saying the unwinding of the Yen carry trade would take down liquidity for months. But this does not seem to be at play, or at least it is hardly evident. Credit spreads are not widening. And the general sense of panic seems to be ebbing.
The next major Central Bank event to watch will be Jackson Hole on August 22-24. We would be surprised to see Fed Chair Powell tilt hawkish at that time, premised on a benign July Core CPI. After all, with Yen carry unwind roiling FX and with slowing inflation, plus, questions about the health of the labor market and consumer, we would expect Fed Chair to lean dovish.

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 the view of Mark Newton, Head of Technical Strategy, 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 ended 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 percolating 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~~ Tame
~~8/13 6:00 AM ET: Jul Small Business Optimism Survey~~ Tame
~~8/13 8:30 AM ET: Jul PPI~~ Tame
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:

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