“From one thing, know ten thousand things.” ~Miyamoto Musashi

Good evening:

With this week’s rally, the S&P 500 has completed 77% of the retracement of its entire bear-market decline from 4,819 (January 4, 2022) to 3,491 (October 13, 2022). It also recorded its highest close since April 2022. 

This was no surprise to Fundstrat Head of Research Tom Lee.

On Sunday evening, Lee made a rare tactical call on the S&P 500, predicting that the index could rise 100 points or more this week. Much of that call was based on his expectation for the June Core CPI coming in softer than consensus – and it did, +0.16% vs. consensus expectations of +0.30%. “This was a big downside break and the lowest reading since February 2021,” Lee remarked after the official release.

For months, Lee has been pointing out that some CPI components, particularly shelter and used cars, lag what is shown in real-time data. He has argued that when – not if – those components eventually caught up, CPI would start to tank. “And there’s almost no inflation outside of shelter and used cars,” Lee noted.

That’s what is beginning to happen, as shown in our Chart of the Week:

Yet for Lee, this week’s soft CPI and PPI numbers are important not just in their own right, but because they are repeatable. There is more to come, Lee asserted. “Used cars made very little contribution to this month’s decline – the component came in almost flat even though it should be down more,” he said. “And the CPI shelter component still shows acceleration even though there’s been a string of negative monthly data according to [the S&P/Case-Shiller U.S. National Home Price Index.]” 

In addition, “much of the bear case had rested on wages being sticky, staying high, and keeping price pressure high. But if we look at the wage tracker for job switchers, it is absolutely tanking, the lowest since 2021,” Lee observed. 

In short, inflation is falling like a rock, and the soft June CPI print is likely to flow through to Core CPI prints of 0.20% for July and August. And in further calls into question whether “higher for longer” makes sense for the Fed.

Head of Technical Strategy Mark Newton saw this week’s rally as a continuation of a trend that began months ago: “It's been a great period of acceleration that started right at this time in mid-May. That's when we got about 4,200, and that’s when the markets really started to broaden out,” he said during our weekly huddle. “Now we're up here right close to 4,500, which was the year-end target I originally set my 2023 outlook in January,” he observed. He recently raised his year-end target to 4,700, independently in step with Lee’s expectations for the year.

Although Newton comes at his views from a purely technical perspective, his outlook is similar to Lee’s macro-based one. “It's a good market, but it's not without its risks. I don't think we can go on in a straight line. August has the potential of seeing consolidation. It's going to be a choppier second half, I think.”

Looking at the current state of things, Newton said, “I like the fact that Tech has taken a backseat a little bit and we're seeing other sectors start to come to the fore – Financials, Materials, truly a very nice broadening out which is a very good sign.” Furthermore, “Energy has come back with a vengeance. In the last week, Energy has been the number one performer – we just broke a downtrend, which is very, very good for the sector. Discretionary and Materials have also done very, very well.” 

The broadening has been more than just sector-based. “It pays to look at things on an equal-weighted basis. The regular traditional SPDR ETFs are very much large-cap weighted. For example, XLK was only up less than 1%, but actually, if you look at Technology equal weighted, it has done much, much better. It's up more than double. So right now the uptrend is very much intact. We've seen a nice broadening out.” 

Other thoughts from Newton:

On sentiment: “Sentiment is starting to get bullish right now, but there's still a lot of bears out there. We're not seeing bearish percentages as low as what we would need to see in order to worry that we're going to have a correction.”

On assets other than U.S. equities: “The dollar has plunged. We're actually at the lowest levels now since last spring. So that should be good for emerging markets, it should be good for the metals, it should be good for commodities.”

Elsewhere

UK Chancellor Jeremy Hunt unveiled several new initiatives intended to make the United Kingdom’s financial-services sector more attractive and competitive. Among the initiatives discussed in his annual address to the City of London was a plan that will encourage insurers and pension funds to invest in start-ups and infrastructure projects, and another that would reverse the MiFID II’s forced  “unbundling” of investment research from trading expenses.

China’s CPI rate fell to 0% YoY in June, leading to fears of deflation and the economic stagnation that generally accompanies it. The country’s June PPI fell 5.4% YoY, the sharpest decline in this metric since December 2015. Both numbers came in below expectations. The country’s rate-cutting efforts to counter previous instances of deflation were helped by similar moves by other countries’ central banks, but this is unlikely to be the case this time, given high inflation rates in most other major economies.

The E.U.-U.S. Data Privacy Framework was finalized this week, easing regulatory and legal uncertainty for major U.S. tech companies like Alphabet, Meta and others over whether and how data about European users can be transferred to data centers in the United States. The uncertainty arose as a byproduct of concerns over American intelligence and mass surveillance efforts violating the privacy rights of EU citizens. 

St. Louis Fed President James Bullard announced his resignation, effective August 14, 2023,  in order to accept a position as the dean of the newly renamed Mitchell E. Daniels, Jr. School of Business at Purdue University. During this latest rate cycle, Bullard has been widely viewed as one of the most hawkish at the Fed, though he did not have a vote on rate decisions in 2023. Kathleen O’Neill Paese, the St. Louis Fed’s first vice president and chief operating officer, will serve as interim president at the St. Louis Fed until a permanent successor is named.

Another strike hit Hollywood this week as members of the Screen Actors Guild - American Federation of Television and Radio Artists (SAG-AFTRA) joined the already-striking Writers Guild of America in their efforts to secure better compensation from studios. This means an industrywide shutdown in Hollywood, something that has not happened since 1960 Similar issues are at play, centering around disagreements about streaming-related residuals and concerns over the growing use of artificial intelligence. 

And finally: The United Nations Development Program announced that 25 countries successfully cut their poverty rates in half over a 15-year period, most notably India, which halved its poverty rate between 2005/6 and 2019/21 and lifted 415 million people out of poverty. The UNDP also singled out China for having lifted 69 million people out of poverty between 2010 and 2014, as well as Indonesia, where 8 million people exited poverty from 2012 to 2017.

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