“I try to do the right thing at the right time. They may just be little things, but usually they make the difference between winning and losing.” ~ Kareem Abdul-Jabbar

Good evening:

It was a choppy week marked by continued challenges for investors and an abundance of economic data, including CPI and PPI numbers. Headline CPI for August came in hot, above both Street expectations and Fundstrat’s. Yet, as Head of Research Tom Lee noted, “there was a relatively positive follow through” to the news, reinforcing his case that September’s weakness was front-loaded. “We expect the overall tone of markets to improve as we head into the end of the month,” he said. 

There might also be a fundamental reason for the market’s mild reaction to the higher-than-expected core CPI. Much of the increase was driven by an unexpected surge in the airline-fares metric used in its calculation. Ken Xuan, our Head of Data Science, found that this was due to the methodology used to strip out seasonality factors in airfares (they peak every year in the summer season due to high demand) rather than any inflationary pressure. In our weekly research huddle, Xuan argued that this is something the Fed’s decision makers will be aware of and consider going into next week – that, and the fact that rate hikes don’t significantly affect airfares. 

This week’s ECB news was also a potential positive preview for the upcoming FOMC meeting. After its 25 bp hike on Thursday, ECB President Christine Lagarde admitted the possibility that “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target [of 2%].” After Lagarde’s comments, Fed futures markets repriced the odds of a hike in September and November lower. Our constructive base case for the rest of the year remained further supported by Thursday’s release of August PPI numbers, with core PPI still running at what Lee described as a “very very good 2% YoY range.” He added, “This is bolstering our view that CPI will stay muted as well.”

Yet in the nearer term, Lee sees the markets as having reverted back to a “frustrating game of inches.” That’s similar to the view of Mark Newton, Head of Technical Strategy.

“It’s been an interesting few weeks. Markets have been largely choppy and sideways,” he said during our huddle. “The market has broken down from July — we attempted to rally but we're sort of churning.” 

Despite what we’ve seen with the major benchmark indices, Newton pointed out that “a lot of the equal weighted indices have been a lot lower.” And to the extent that the indices have held up in recent weeks, “a lot of that has been because of Technology,” he said. “Breadth has actually been contracting over the last couple months, but as long as Tech can hold in there, I think any sort of decline in September and October is probably going to prove pretty muted.” 

It remains important to watch yields, Newton said. “To get truly positive on equities, we need to see the S&P get up over 4550 or see rates really start to break down and get under 4.05%. That would be very encouraging, but neither of those have happened yet.”

In fact, he noted, “Yields are still in pretty good shape. And my thinking is we are going to eventually break for around [4.36%] sometime over the next month, and that's going to spook equities.”

Diving a bit deeper into his work, Newton told us, “The cycles are still sort of negative. I believe we might see a bounce in October, but my thinking is November is going to be the real turning point. I think we're in for a choppy couple months.” 

Lee acknowledged that “we are in kind of a risk-off environment.” Still, he pointed out that “the equity put-call ratio surged to closing high of 1.2 yesterday, the third such elevated reading in 6 months. This often signals equity lows in the next day or two, and it strengthens our view that equity markets likely drift higher into month end.”

Our Chart of the Week illustrates this final point:

On Regional Banks

Since May 7, we have had a tactical overweight call on regional banks (KRE 0.85% ). As a group, they rose 15% (compared to 9% for the S&P 500). But there has been consolidation in recent weeks, even though – as Xuan pointed out, “recent FDIC reports show that [their] health hasn’t gotten any worse.” He admitted that “they haven’t gotten any better either,” however.

Whatever the reason for the recent consolidation, Newton’s technical views suggest that “regional banks are under a substantial amount of pressure. If you have a time frame of the next couple months, I don't think regional bank stocks are going to work, in my view.”

For these reasons, said Lee, “we feel it is prudent to become more selective and remove our tactical overweight recommendation.”

Elsewhere 

Roughly 13,000 members of the United Autoworkers (UAW) walked off the job this week, targeting GM, Ford, and Stellantis (Chrysler) plants in Michigan, Ohio, and Missouri. Though the strike is limited in scope for now, this is the first time the UAW has simultaneously targeted all three companies.

Arm went public on Thursday, returning to public trading after previously being listed in London and on the Nasdaq. It was acquired and taken private by Softbank in 2016. (After this week’s IPO, Softbank still owns a 90% stake in the chip designer.) Among those taking a strategic stake were Apple, Google, Nvidia, Samsung, AMD, Intel, Cadence, Synopsis, Samsung and Taiwan Semiconductor Manufacturing Company.

Ireland expects a EUR 10 billion (USD $10.7 billion) budget surplus for this fiscal year, driven by a surge in corporate-tax revenues from multinational tech and pharmaceutical companies that have set up operations in the Emerald Isle. This has led to an enviable problem: deciding what to do with the extra money.

China reported positive news about factory output and retail sales, with industrial output rising 4.5% YoY in August, better than both the 3.9% expectations for the month and the 3.7% YoY increase in July.  Consumption also rose, with retail sales up 4.6% YoY in August, better than the expected 3% and also the 2.5% figure reported for July.

UK officials reported the country’s GDP shrank 0.5% in July, below expectations of a 0.2% contraction. The disappointing numbers were attributed in part to abnormally heavy rainfall, which affected the construction and retail sectors. 

China’s Foreign Ministry told news outlets that there had been no official government ban on the use of iPhones, countering (but not refuting) stories published by several news outlets last week reporting that employees had been verbally told to stop using Apple smartphones at work. The Ministry spokesperson nevertheless pointed out that some media sources had alleged unspecified security flaws in the iPhone. 

And finally: Frank Rubio has broken the U.S. record for longest space flight ever, having spent 359 days in orbit on the International Space Station as of publication time. NASA’s Rubio, a flight surgeon and lieutenant colonel in the U.S. Army, was originally scheduled to return to Earth in the spring, but he was forced to stay longer after the Soyuz spacecraft slated to bring him home was damaged by a tiny meteorite. He is scheduled to return on September 27.

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