- SPY flatlines ahead of Jackson Hole meeting.
- Fed member Bostic says data could lead to a 75 basis point hike in September.
- Yields rise as bets increase for a 75 basis point hike.
Equity markets continue to trade sideways ahead of the Jackson Hole symposium, which takes place today. Investors have been doubting the recent bullishness that saw the equity rally continue and frustrate many investors. Yields have recently moved higher on some poor PMI data and recession fears resurfacing. Risk taking was in short supply before the meeting.
My view is that little clarity will come from the Jackson Hole meeting as the Fed is just as confused as the rest of us over what is the next step. It seems likely a recession is already in play or imminent but whether inflation is peaking or not is the more important question. The recent weakness in global PMI this week highlights the difficult path for the Fed. If it wants to fight inflation, it will need a 75 bps hike, but that may exaggerate the economic slowdown. Most likely he will stick to the data dependant view with perhaps a slight tilt to hawkishness.
The student loan deal announced yesterday is another form of stimulus at the Fed, and inflation could have done without, so this may tip the balance to a slightly more hawkish tone in my view. There will be enough for both bulls and bears or doves and hawks, and it is up to the market to follow its path. Recent PMI and earnings from higher-end retailers point to a marked slowdown in consumer spending. So far the lower-end retail is adapting well. This is what we would expect to see in an inflationary recession, especially at the early stages.
So far the recession is moving exactly as it should. Earnings season was better than feared. Companies are passing on rising costs to consumers, who are accepting them. This process takes time, and consumers are already shifting to lower-cost alternatives and shunning luxury and higher cost products. Inflation is a gradual process. It creeps up slowly on consumers who take time to adjust their spending. They will eventually, and that is the problem for the US economy. Wages will need to keep pace with inflation to maintain demand, but this then makes inflation self-sustaining. At some stage, something has to give.
Right now we are in neutral. Positioning and short covering have caught up, hence the stall in the rally. The next leg needs a catalyst, and bond yields are likely to provide that catalyst. The 200-day provides the first resistance at $430, and a break there would open the door to a move to $460 in an extended move likely brought on by a further squeeze and frustration trading. The pain trade is still higher. If something breaks and the market moves lower, look for $400 and then $360 as key levels. Right now is the time to wait though. There is no high probability trade available to us.
SPY chart, daily