Today was not quiet – the long awaited ECB decision to hike rates for the first time in 11 years was by more than expected, Initial/Continuing Jobless claims were hotter than expected, and it was the busiest earnings day of the season so far. The last point helps explain some of the outperformers – Autos & Pharma/Biotech led today, with Tesla (TSLA, +9.8%) and Danaher (DHR, +9.2%) reporting better than expected numbers.

It finally happened – and oh man it was not what we were expecting. CPI this morning came in hotter than expected, at a whopping 9.1% YoY vs estimates of 8.8% – that is the largest gain since 1981. The print sent futures lower as investors were reminded that the Fed has been behind the curve, and while we’ve seen input costs going lower as of late, that was too little, too late. Investors are now pricing in only 25% probability of a 75bp hike – there is now 75% probability of a 100bp hike (up from 0% chance of a 100bp hike a week ago), as investors ponder if the Fed will join the Bank of Canada in hiking by 100bps at their next meeting. On the bright side, while the Core number was higher than expected, it still showed deceleration from 6% to 5.9% on the YoY rate. CPI also showed that gasoline prices were up 11.2% MoM, but with prices having marginally fallen in recent weeks there is hope for a softer number come next print.

Patience is key – Investors were stuck waiting today, both for the wave of important economic data later in the week & for the beginning of earnings season. This week brings CPI & University of Michigan data, with CPI expected to come in at 8.8% YoY, which would be a fresh four decade high. Despite expectations of a further MoM/YoY CPI increase, University of Michigan expectations are flat for both Sentiment and Current Conditions. Investors are also interested in seeing how earnings go – some sell side analysts believe that corporations are resilient enough to pass on higher costs to consumers, while some  strategists are not convinced that is the case. Earnings kick off this week, with JPM & MS Thursday pre-market.

Today was always going to be about NFPs, especially on the heels of four consecutive green days for the S&P. The higher than expected print sent futures sharply lower, as investors nibbled through the wider implications for the market. Yes it means the economy is still in decent shape. It also means that the Fed has a clear path to continuing to tighten/hike rates, which in turn means that companies will have to deal with it. Investors are now also pricing in a 98% probability of a 75bp hike in June, with the residual 2% no longer pricing in a 50bp hike, but rather a 100bp one.

Early on futures were lower as investors realized that yesterday didn’t change things too much: All major indices were still below falling 50 day averages, and it was only a 49% up day. The overall trend remained to the downside, and investors remained wary of a recession, pricing for this expected environment. Then this morning’s data positively surprised, with Services PMI coming in higher than the preliminary numbers, while ISM came in higher than expectations. This helped move FOMC July estimates back above 90% for a 75bps hike, from yesterday’s 84%. It seems so far that the economy can handle higher rates.

Not a bad way to start the half, granted we’ve got a loooong way to go. Also nice to see that “statistics” once again were a good predictor. Historically July 1st is one of the most bullish days of the year, being an up day 87.5% of the time over the past 21 years. Markets were ready to achieve this by whatever means necessary, shrugging off a higher than expected Manufacturing PMI, declining construction spending, and an expectation revision for US GDP from JP Morgan that looks suspiciously like it’s predicting a recession. The optimism wasn’t always a constant – as has been recent fashion, the markets were volatile intraday (volumes also muted: SPX -13.71% vs. the 20 day moving average), with multiple intraday moves greater than 1.5%. Value outperformed growth (SPYV +1.25% vs SPYG +0.71%), although with only one sector in the red, today felt more about the tide than anything else.

And that thankfully is a wrap on H1, the S&P’s worst since 1970. The NASDAQ,  not to be outdone, had its worst H1 ever. The 3 times before this it was down more than 15% in H1, it continued to fall…it’s only been around since ’71 though, so maybe the data isn’t perfect? Early on today investors were heavily focused on the PCE Deflator, which came in below expectations. For those looking to grasp onto any glimmer of hope, improvement in the Fed’s preferred inflation measure could have been it. But the Inflation Adj. Personal Spending number overshadowed it, after falling for the first time this year. A weak consumer is something we have seen plenty evidence of lately, the most recent example of which is Restoration Hardware, who had to lower guidance last night. It’s one thing to have to lower guidance, and another to have to do so twice in the span of a few weeks. The worrying implication is that estimates for this pending earnings season remain far too high.

We seem to be wrapping up the week on a long awaited bullish tone, but the optimism should be taken with a grain of salt – some might even call it misplaced. We still have plenty of rate hikes to contend with, and despite some chatter that rate cuts might come H2 of 2023, for those who buy it, that’s still plenty away. We have to get through quarter end/this round of earnings first, and we all know how tough the environment that will be reported on was.

Not a good day for the markets, as traders pared risk into the biggest economic datapoint for the week. The headline CPI figure tomorrow certainly is what investors are keeping an eye on, especially as the Fed is set to hike rates another 50bps. Futures started higher this morning, but rolled over after Lagarde & Co announced they plan on raising rates next month (first time in 11 years).

Not the end to the week we wanted, but perhaps it was the one we were expecting. As a large number of polos populated the thinned out streets of Midtown Manhattan today, it was clear the summer Fridays are in full swing. S&P volumes down 27% vs. the 20 day average could have told you that too though… Early on sentiment was strained as Elon “I have a bad feeling about the economy” Musk announced that Tesla would be joining Microsoft and Meta with a hiring freeze.