Green was noticeably absent from the screen today as markets took a well-deserved pause from the recent rally. Based on the lack of volumes (SPX -15.5% vs 20d), as well as the fact that both the S&P and NDX failed to go below their support levels (4190 and 13k, respectively), the weakness felt fleeting. After all, 21% of the SPX still advanced and the selling was not elevated (using overall volume as an indicator), so there were no signals to indicate a permanent change to upward momentum. There was nothing sinister to instigate the fall which began with futures’ weakness pre-open. Retail sales data stagnated last month as we saw declines in auto and gas spending, but gains in other categories suggested spending still remains resilient. Net/net — the number wasn’t great, but TJX (+2.8%) and Lowe’s (+58bps) reporting better than expectations helped balance the weaker number a bit. Quite frankly, the most annoying move was of the meme-madness sort in Bed, Bath and Beyond, which was up another 12% (up almost 65% this week alone) defying all laws of physics. No comment.

The dog days of summer are here and that may be helping keep US markets elevated. Volumes on the S&P 500 were down 14% versus the 20 day, and overall volumes were only helped by a surge in interest in the meme stocks (Bed Bath Beyond up another 29% today). But before traders pass the blame, the repositioning that started last month is continuing to find its way into stocks. In July, the BofA Fund Manager survey showed cash levels at their highest levels since 2001, and equity positioning at 2008 levels, and today’s survey showed a slight decrease to those fears (“apocalyptically” was the word to describe July). While managers are still bearish (58% see a global recession), they cannot sit on cash if the S&P starts to move higher (it is +11.4% since July 15th) and therefore even nibbles are helping support the indexes. Retailers were the center of attention today with earnings from Home Depot (HD +4.1%) and Walmart (WMT +5.1%) helping spur a late morning rally for the S&P (10 of the top 20 performers were in the Retail sector). But as the index tested its 200-day moving average (4326) for the first time since late-April, the S&P could not manage to punch through, still closing above 4300 however. The consumer theme will continue tomorrow with July Retail Sales expected the show a m/m increase of 0.1%. Plus, investors will see earnings from Lowe’s, Target and TJX. Perhaps the biggest datapoint to monitor will be the Fed Minutes at 2pm. Since the Fed raised rates 75bps last month, estimates have been oscillating between 50 and 75bps for September, and traders will be keyed into any insight to direction, especially after the CPI last week. So far, Fed heads have maintained their rate hike communication discipline, even if the Street is looking for a transition to cuts next year. A realization that higher for longer is the reality could impact the recent momentum in stocks, but maybe the next downdraft could be met with sponsorship by the “apocalyptic” crowd.

Saw the Tina Turner musical over the weekend (it’s been quite the trip down memory lane pop-culture wise for yours truly lately) and it was outstanding. But it wasn’t all peaches and cream for the Queen of Rock ‘n’ Roll with a series of ups and downs until making the ultimate comeback. The market has been on a similar journey of late, but it’s comeback hasn’t been as warmly received as Private Dancer. The summer season and its accompanying light volumes have provided the right tonic for a market that many still question. But like Proud Mary it keeps on rolling, today’s move higher somewhat perplexing given the data we got before the session got underway. There have been various canaries in the coal mine emanating from China for some time, and the misses on industrial production and retail sales overnight did little to dissuade that thought. The US data we received wasn’t much better, orders and shipments  for the empire mfg index coming in at shockingly low levels. This was accompanied by a weak housing sentiment figure, with the buyer traffic number hitting the lowest levels in 8 years. And yet…

While some are calling this rally the most hated of the past 12 months given investors have been taken off guard due to positioning, there’s no denying it is significant. Unfortunately, the latest data shows that HFs (non-dealers) are net short the S&P, in fact the largest notional short on record. The speed of this rally has left some unable to make the necessary changes, but that’s not stopping the markets. Keep an eye on 4177 on the S&P and 13k on the Nasdaq 100 though – if we go back below these levels, that would actually give the bears something to hold onto. This morning saw plenty of economic data, which also pointed toward peak inflation having passed. The latest University of Michigan data rose to a 3 month high on better expectations about both the economy and personal finances. Inflation expectations were mixed, and worth noting the year ahead outlook was reduced. Tech was the leading sector today as BAML noted investors are rushing back into stocks & bonds. The positivity on easing conditions may be overdone as the Fed’s Barkin said that more hikes are needed in order to control inflation. This disconnect between what the markets are pricing in and what the Fed is saying leaves plenty of room for a correction. Despite all sectors in the green, Energy lagged thanks to weaker crude, after OPEC forecasted the global oil market will tip into a surplus this quarter. With earnings season pretty much behind us, the market can now look forward. Next week has a bit of housing data, but the real headline will be Fed minutes on Wednesday. The market is pricing in 58% likelihood of a 50bp hike, and 42% of a 75bp one for the September meeting. This (relatively) dovish positioning leaves plenty of room for surprise.

With tech (CCMP) starting the day well above its June lows, it’s no surprise that things slowed down a bit today. While the softer than expected PPI print this morning furthered the narrative that inflation has peaked, the markets seemed to realize that maybe the kneejerk reaction yesterday was a bit more than was merited. The PPI decline was the first in more than two years, due to a dip in the costs of goods (although services prices edged higher). Further, inflation is not the only thing cooling, as this morning we saw that the labor market is also beginning to ease. Any signs of cooling were received well, but with things still elevated, we are far from ok. There is still a long way to go and the S&P demonstrated this, starting in the green but losing confidence as the day wore on. Energy led for most of the day after the IEA said they saw little chance that OPEC+ will supply more oil, and as oil demand forecasts were raised – crude unsurprisingly outperformed. Yields were higher after this morning’s data (and realization the Fed is still targeting 3.9% end of year) brought Banks & Insurance to the front of pack as well. Tech was the day’s underperformer, although they remain far from undoing yesterday’s move. While the macro picture is the hot topic of debate in markets, earnings continue to dictate some single stock moves. Disney (DIS, 4.75%) last night reported better than expected subscriber growth, and said it would raise the price of Disney+ by 39%. Despite strong parks numbers from Disney, Six Flags (SIX, -18.19%) tumbled after its theme park attracted fewer visitors. Though it is worth noting that the US Dollar (DXY) is down for 4th day in a row, and the EURUSD is testing key res 1.034  – a break above this level would confirm rise towards 1.08. Tomorrow brings the latest University of Michigan data, and consumer sentiment is expected to rise. With markets drifting lower throughout the afternoon, we have to hope they don’t do the same into the end of week.

While economists expected another modest rise in inflation on a MoM basis, they did not expect headline CPI to slow significantly from 9.1% to 8.5% Yoy, ending a 16-month streak of gains. But what is in a CPI? Quite a bit, actually. Shelter costs (which continued to rise), food prices (which continued to rise), services inflation (which continued to rise), and energy and goods prices, which mercifully, slowed. But perhaps most importantly, was the real average weekly earnings which continues to plunge, (down 16 straight months) proving inflation has eroded wage gains. And yet. And yet. The market loved it, whether the drop in CPI was enough to signal a Fed pivot or not. Rate hike odds highlighted a collapse in tightening expectations and risk was back on today baby! Tech led the cause (as we quickly forgot misses from NVDA, MU, RBLX and COIN this week) while telecoms, staples and energy brought it up the rear. We are now through two technical levels– above the 4177/4200 resistance levels on the S&P and below 105.5 on the DXY. The dollar move signals a real change in the markets, and also could serve as a tailwind for companies who were hurt by USD strength this past quarter. As with risk on, so goes yields higher and it’s worth noting in the 10y auction indirect bidders took 74.5% of the print, the highest ratio since Feb. Finally, The Fed’s Kashkari didn’t have anything new to say. The Fed will raise rates and sit there until inflation eases…they are unlikely to cut rates with a high CPI…they are still shooting for 3.9% by year end. Thus, the probability of a 50bp hike in September nearly doubled since yesterday. Investors have chosen to slice this as very positive for equities. After all, we are seemingly past “peak inflation.” But, with inflation still at 8.5%, it’s hard to see how that could be good for anyone.

As soon as Micron (MU -3.5%) announced they would be following in the footsteps of NVDA’s (-4%) warning from yesterday, investors knew markets would be on shaky ground today. Especially since semis have been a bit of a leading indicator for the broader tech sector lately. But, as much as further evidence of a slowdown in chips was not what investors wanted to hear, semis weren’t the only sector dragging major indices. Consumer Durables underperformed as well after Ralph Lauren (-5.5%) and Signet Jewelers (-12%) both posted disappointing outlooks, with the latter also announcing a purchase of Blue Nile. Energy stocks were the strongest sector, despite crude in the red, after Berkshire Hathaway increased their stake in OXY (+4%) to 20%. Higher yields also meant financials sat towards the top of the S&P. But the stronger sectors were unable to save the Nasdaq from suffering its third down day in a row and the S&P from closing down 40bps. Especially since there was also some negative data. Apparently, optimism among small US business owners barely improved in July, and remained well below pre-pandemic levels. Furthermore, 37% of business owners reported that inflation is still their single biggest problem. Thus, the real focus remains on tomorrow’s CPI, which will be quite binary in nature. One major risk is that LO’s haven’t participated in this rally and a lower number could produce a real squeeze towards 4400 (even 4600) on the S&P. Worth keeping an eye on 2 things: food prices and DXY. While input costs are easing as crop futures have retreated to pre-war levels, the U.S. Dept. of Ag is expected to cut its outlook for US corn & soybean yields – the real effects of the heat wave being revealed. In terms of the DXY, a break below 105.50 would be a sure sign of change.

Admittedly I’m a bit late to the game but over the weekend I finally did it. After a slow-ish August week, I felt the need for speed. The sequel to the iconic 80’s movie based on the elite Navy pilots included all of the sentimental checks: breathtaking fight scenes in the sky, a cheesy beach montage and of course, Tom Cruise’s impish grin. The 2 hours of brain candy come highly recommended. Markets were feeling similarly nostalgic to start the week, and by nostalgic I’m of course referring to the meme mania from last year. All the familiar faces from wat back then were here for it. There are even rumors that fashionable trade of buying out of the money calls was back ‘en vogue’ after taking a long hiatus. Why now? Much like the producers of a sequel 36 years after the first, the answer is most likely, why not? Despite the roster of Fed speakers last week doing their best to suggest a pivot was not in the offing any time soon, the retail army forged forward but they were far from alone. There were a host of risk on signals to help lift equities early on. The 10-yr yield resumed its descent despite practically the entire Fed roster exhorting the market they were not done on hikes. Palladium is making 3m highs while US high yield credit spreads are lower for the 4th straight day – a break below the May lows would provide another. Things were going swimmingly early on, with all eyes on the S&P as it broke through key levels (4177/4200)…

Just when investors thought they had the current state of the Fed figured out, they were met with a much bigger Nonfarm Payroll datapoint. For the last few weeks, some companies had been talking about pausing and rethinking their hiring plans as recession/ higher rate worries made its way through the system. That led to the Street estimating just 250k in nonfarm payrolls gains for July. But today’s print of 528k, and subsequent unemployment rate drop to 3.5% (50 year low), surprised everyone. Job gains were widespread, and hourly earnings rose 5.2% y/y. This great result however did not sit well with investors intent on finding an out from the higher for longer Fed trajectory story. Prior to today’s NFP, CME data showed a 66% chance of a 50bp hike in September, but that has now shifted to 70% for 75bps. This week, Treasuries have had to reprice the timeline for the Fed pivot to cuts, and the number today pushed yields higher once again (2yr closed at 3.24%, 10yr at 2.83%). Equites have held up though, as the S&P 500 gained 36bps and Nasdaq 2.15%, for the week. Tech and growth had been a driver of the recent equity performance, but today the sector/ factor underperformed. Semis finished 91bps lower after Western Digital (WDC -5.6%) earnings weighed on Micron (-3.7%). Media fell 1.13% after Warner Bros Discovery WBD -16.5%) also missed. Energy closed higher by 2%, helping minimize the weekly loss to 6.81%. Crude however, still managed to remain under the psychological $90 level today, finishing at 88.30. With most of this earnings season now completed (87% for the S&P 500), investors will concentrate their scrutiny on the Fed. Next week’s economic calendar has a CPI reading due on the 10th, and PPI on the 11th, and estimates are for a sequential drop (except CPI core y/y). Treasuries have gained recently in anticipation of a quicker Fed pivot, and this has provided a bid to equities (main indexes above their 100 days/ CCMP and RTY above June highs). But after today’s nonfarm stunner, the Fed may have more room to maneuver with their tightening, forcing investors to remain hyper-focused on Powell and Co.

Another day of indices largely being able to hold on to the previous days gains. That’s not to say the market’s performance today was remarkable on its own. Indices did struggle for direction as investors dealt with cooling jobs data, although the far more important Non-Farm Payrolls hit tomorrow. Earnings continued to dominate, with Alibaba (BABA, +1.88%) sales beating estimates and ConocoPhilips (COP, -1.57%) doing the same, although Eli Lilly (LLY, -2.56%) had to cut FY adj. EPS forecasts. Inflationary fears across the globe not going anywhere anytime soon, and the Fed continues to make sure that investors don’t look beyond the rate hikes – Mester today re-iterating that the Fed is resolved to curb inflation with rate hikes. Worth noting some medium term resistances which were in our sights this morning – while the CCMP and FANG+ are above the June highs, the S&P cash is the one to watch. 4177 is the number we have our eye on, 4200 for the S&P futures. The longer we remain unable to get past these levels, the more vulnerable markets could be to a retracement. Growth continues to help the markets with this rally, as highlighted by Redburn’s relative movers list: Apple has made a 12month relative high, and Amazon and Texas Instruments made 3 month relative highs.