S&P 500, VIX, Seasonality, China, Earnings, Fed, BOC and RBNZ Talking Points:

• The business perspective: S&P 500 bearish below 4,075; USDJPY bearish below 134.00; Long NZDCAD above 0.8050
• Seasonal influences continued in the past week, but the most restrained average week of the year does not absolve a structurally higher rate of core issues
• Ahead, there is a significant series of major event risks, including: China Q2 GDP, US CPI, BOC and RBNZ rate decisions, US earnings and the survey. on UofM consumer sentiment

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A difficult armistice for the S&P 500 and Risk

If the scope of your analysis over the past week was to examine how the S&P 500 – or whatever your preferred “risk” designation – fared through Friday’s close versus the week previous, you would be left with a bullish impression. That would be shallow, but nonetheless bullish given the 1.9% gain from July 1st at 8e. Still, you don’t have to dig deep to see that there are serious issues beyond the insights provided by a weekly line chart. Last week relied heavily on sentiment expectations that will melt away in the future. Event risk should deepen significantly both in the number of releases and in their importance to core fundamental themes. And, perhaps most interesting of all to me is active positioning against the bullish view. Compare the modest rise in the S&P 500 with the lowest weekly volume since the Christmas holidays. Even more remarkable is the positioning of speculative futures traders who are expressing their most bearish exposure relative to the index since June 2020.

Chart of the S&P 500 with 50-Daily SMA and 4-Day ROC (Daily)

Chart created on Tradingview platform

It’s no exaggeration to say that there isn’t much confidence in the market’s progress over the past week. That said, it was still a gain over the period that defied the fundamental odds. Over the past week, we’ve been faced with loaded Fed rate forecasts after the June NFPs, countless data points taking pot shots on recession fears and upsetting geopolitical developments (resignation Prime Minister Johnson and the assassination of former Japanese Prime Minister Shinzo Abe). Nevertheless, the SPX and other interim speculative measures are moving up slightly. I believe this is mainly the result of seasonal expectations. We crossed the 27e week of the year that historically sees the nadir in volatility (VIX) and the second biggest speculative swell (SPX) of the year. We certainly saw these general trends last week, but we didn’t break any records. The systemic environment is much more troubled than in previous years, so the relief is more like an apparent temporary reprieve in a larger storm.

S&P 500 Weekly Performance Chart

Graphic created by John Kicklighter

Key Event Risks and Top Themes for the Week Ahead – Starting with the Recession

Looking at the high-level event risk register for the week ahead, there is an overabundance of sparks capable of generating severe volatility for their local capital market and currency. The trick to turning volatility into a trend is to tap into a deeper fundamental theme. There is plenty of material to achieve this, starting with the ongoing debate about the threat of recession. There is no shortage of data that will address this critical macroeconomic observation for short-term traders and long-term investors. There are focused data points such as US retail sales as well as comprehensive but adjacent measures such as the numerous sentiment surveys (Japan Eco Watchers, US business optimism NFIB, Eurozone investor sentiment ZEW) at hand, but the main Western billing is Friday’s University of Michigan consumer. sentiment report after dropping to record lows in the last update.

Chart of US NFPs with level of “surprise” between expectations and actual results (monthly)

Chart created by John Kicklighter with BLS data

When it comes to recession watch, there’s no more direct route to an economic update of global significance than China’s Q2 GDP update. I generally take this data with a grain of salt, but the final quarter will need to reflect the impact of the forced economic shutdown resulting from the government’s efforts to control Covid. As we take this number, it should be noted that there are signs that the government may reinstate these growth-restrictive procedures as cases of new infection begin to emerge. If we move from a singular event to a most effective comprehensive theme, the prize must go to US profits. While I’ll be looking at the major releases from TSM and Conagra, the focus is on banking. Given their sensitivity to growth forecasts, financial conditions and stress tests; this is highly monitored GAAP.

Chart of USDCNH overlaid with Shanghai Composite ratio to S&P 500 (daily)

Chart created on Tradingview Platform

Interest rate speculation: the other fundamental current

While I view monetary policy as an ongoing systemic theme in the week ahead, it should be noted that it still weighs on recession fears. The most hawkish major central banks have made it clear that in their fight against price stickiness, they are more than willing to suppress growth. While they don’t say they’re looking to trigger a recession in order to bring inflation down to acceptable levels, it seems the market thinks that might be part of the calculation. Nowhere in the developed world is this debate as intense as in the United States. After the June NFPs beat expectations last Friday, the market appeared to translate the data into a green light for the Fed to hike another 75 basis points on July 27.e rather than reflecting real relief on the economic front. The DXY Dollar Index stretched further after the news, but the question is how much of this aggressive outlook is already priced into the greenback’s multi-decade highs? Below, I compare the dollar to rate forecasts through the end of 2022, then to expectations (of rate cuts) in the first half of 2023.

DXY Dollar Index Chart (Quarterly)

Chart created on Tradingview Platform

Over the past few months, interest rate speculation has surged across the board, with the notable exceptions of the Bank of Japan and the People’s Bank of China. After a series of 50 and even 75 basis point hikes and moves among developed market policymakers, we have seen an aggressive forecast update from the Fed, BOE, BOC, RBNZ , the RBA and even the ECB. But how many more prizes are there? The two most provocative central bank decisions on my radar are the FOMC and the ECB, but they are still weeks away. For now, I will have to settle for data such as the US CPI release on Wednesday.

Relative central bank monetary policy stance

Graphic created by John Kicklighter

If you’re looking for direct commentary on interest rate policy, look no further than the NZDCAD. Not the best pair to answer the Reserve Bank of New Zealand (RBNZ) and the Bank of Canada (BDC) rate of decisions this week, but he is certainly in the center of the action. Both central banks are expected to raise their respective benchmarks by another 50 basis points, with the former expected to reach 3.58% by the end of the year while the latter reaches 3.50. In general, the Canadian dollar benefited from its hawkish course, but it was anything but a straight-line move, even for pairs with more extreme rate contrasts. That said, the New Zealand dollar generally acted as if it was facing rate cuts. The disparity in return expectations and currency response is the position the Kiwi reflects with low liquidity outweighing the appetite for higher rates. But maybe an even bigger increase could change that mix?

Chart of the NZDCAD overlaid with the 2-year yield differential of New Zealand and Canada (daily)

Chart created on Tradingview platform