S&P 500, FOMC, recession, EURUSD and USDJPY talking points:

• The business perspective: S&P 500 bearish below 4,075; USDJPY bearish below 132.00
• The combination of an unexpected rise in the US CPI to four-decade highs, coupled with record levels of consumer confidence, pushed otherwise resilient sentiment to the brink.
• Major event risk in the week ahead if FOMC decision will control anticipation and reaction, but watch out for global rates and growth outlook

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A collapse that bodes ill of what awaits us

During the first half of last week, markets did their best to keep sentiment in check, perhaps hoping to benefit from a “summer doldrums” mood as anticipation of the next event risk major event (the FOMC decision) attracted our attention more. out. However, the fundamental pressure proved too strong for the complacent to maintain control. What may have started as a ‘break of necessity’ turned into a movement of conviction until the end of the week when it became clear that the likelihood of recessions across the world was no longer an aberrant scenario. For the benchmark S&P 500, the smallest trading range from 2022 to Wednesday turned into a complete breakdown. There was considerable interest that the market had its worst week since January, but I was more impressed/worried that Thursday’s/Friday’s crash alone was the worst two-day drop (5.2 %) In two years. We will start the new week with still very fresh momentum and a bear market technical designation at less than 2%.

Chart of the S&P 500 with 20 and 100 day SMAs, daily spreads in blue and 2 day ROC in purple (Daily)

Chart created on Tradingview platform

A technical breakout on a singular asset – even one frequently seen as indicative of general risk – is not a strong enough metric for me to believe the tide has truly swung towards “risk aversion”. Yet the pain suffered at the end of last week was far from isolated. Global equities took a significant hit, as did emerging market assets, junk bonds, Treasury derivatives and even carry trade. In other words, the fear was contagious; and that’s what I consider to be one of the most productive drivers of markets overall: sentiment across the financial system. While there have certainly been times when various fundamental influences have overlapped to drive the market into a trend, the most persistent motivation for extended moves is the collective fear or greed spreading across the market. It seems that we are closer to this “vicious circle” than anything we have seen in many months.

Risk Trend Intensity Chart

Graphic created by John Kicklighter

The mood has changed and there’s a minefield ahead of us

Had there been no risk of a major event during Friday’s session, the break we recorded last Thursday could have very easily been extinguished. While the S&P 500’s technical move was certainly provocative, this breakout alone likely wouldn’t have lured longer duration investors and diehard bulls from their perch. The event risk that hit the following session added serious depth to surface-level fears. The US CPI – the market’s favorite gauge of inflation – unexpectedly accelerated to 8.6%, its highest level in 41 years. This could have been interpreted as an abstract callback to the Fed’s rate forecast curve if it weren’t for the University of Michigan consumer confidence survey that followed an hour and a half later. The title’s sentiment reading has absolutely plummeted to the series’ lowest reading in its history, dating back over 60 years. The link between inflation, rate hikes and the risk of recession is increasingly evident. And, given that commodity price pressures like gasoline prices grow daily to record highs, exposing central bankers’ impotence; it is very likely that a fundamental switch has defaulted to a bearish view “unless convinced otherwise”.

Chart of US CPI YoY, 5-Year Breakeven Inflation, and Average Gas Prices in Dollars (Monthly)

Chart created based on St. Louis Federal Reserve Economic Database

As we look to the week ahead, there is capacity for a relief rally against risk benchmarks. At the very beginning of the week, there is a kind of economic calm with few key data points expected that could allow the market to go into “wait and see” mode in anticipation of the important FOMC rate decision on Wednesday. . That said, escalating inflation risks have skewed central bank scenarios to higher degrees of disappointment. The Fed is unlikely to be able to rein in inflation without shooting a grenade for the market. Either we are faced with a policy decision based on hope (inflation cools on its own amid slow rises) or desperation (ineffective policy mix trying to balance growth and inflation ), or we represent the nuclear options (fight against inflation at the risk of a short-term economic crisis). contraction). There is no good option here. Additionally, there are other major central bank rate decisions that will only serve to underscore the impotence of policymakers – especially the BOJ and SNB who have been content with extreme accommodation amid of the world turn. If sentiment deteriorates on the rate front, it will only further amplify the impact that growth-driven data will have on markets, such as: retail sales in the US, China and the UK -United ; Eurozone investor sentiment; Employment in Australia; New Zealand GDP and much more.

Calendar of major economic events

Calendar created by John Kicklighter

Top markets to watch next week

There is a wide range of markets that I will be following throughout the coming week, but there are two benchmarks that will stand out above all others for their systemic implications. The first measure of great importance, with a distinct risk orientation, will be the VIX volatility index. Whether you think of it as a straightforward “fear gauge” or a more complicated speculative instrument with “hedging” properties, there is value to be gained from its reflection of my risk measure to a favorite look: the S&P 500. We have already been heading broadly lower through 2022, but we have yet to see a state of panic due to the underlying conditions that often signal that a market has burned his anxiety. This is what we have seen in periods like March 2020, February 2018 and August 2015. Instead, our current situation sees a steady increase in volatility with relatively controlled spikes. This is the kind of backdrop that can respond to an extended downtrend. I will be watching the VIX to see if it moves closer to the 50 mark as a benchmark for extreme sentiment.

Chart of VIX with 20-week SMA (week)

Chart created on Tradingview platform

A more complicated market that should be on all traders’ radars is the USDJPY. I’ve been talking about this couple for a few months because it represents some major fundamental themes that can converge or oppose each other. Until last week, the stable view of risk trends allowed the outlook for interest rate expansion to lift the yen crosses higher. Still, the sharp decline in risk trends last week posed a distinct threat to this major and its peers hitting multi-decade or multi-year highs. Rate forecasts for the Fed have certainly risen in the past week, as fed funds futures show, but how much more is there to assess on that front? And how much of a premium is there to build up these capricious risky assets? If the USDJPY reverses sharply despite an aggressively hawkish path from the Fed, it may have profound implications for the market’s view on broader risk.

USDJPY chart with 20 and 100 day SMA and ‘Tails’ (daily)

Chart created on Tradingview platform