S&P 500 daily chart
This is what I wrote in my preview of the nonfarm payroll:
In terms of strategy, there is a lot of talk of bond buying on the strong non-farm payroll prints in anticipation of lower CPI next week. The forex reading for this trade would be to sell the US dollar if the non-farm payrolls were stronger.
Nonfarm payrolls were not stronger but bond buyers and dollar sellers have been waiting. There was a whole class of investors who were drooling at close to 5% yields over the course of the two years yesterday, but were reluctant to buy ahead of the non-farm payroll. They arrived today and the 2s fell 8 basis points to 4.92%, sending the dollar lower.
There is also a strong belief that Tuesday’s CPI report will provide all kinds of hints about the “golden course” that the Fed’s Goolsby is laying today. There does seem to be a good chance of a return to the inflation target without a recession. CPI is expected at 3.1% next week with estimates ranging from 2.9-3.2%. There are many estimates coming, but the chance of sub-3% inflation is real and with commodity prices and housing inflation still contained later this year, there’s a good chance it will stay near 3% and fall below that early on. 2024.
Now the questions become: Are we selling the truth? If everyone is positioned for a lower CPI reading, the trade will fade into profit-taking and the market starts to consider profit risks and the possibility of a higher retail sales reading the following week. I’m sympathetic to that notion, especially since the market still can’t fully price in the July increase, which I think is a done deal.
In the meantime, I think cyclicals can come together from here as the idea of getting around a recession seeps through.