Markets for the last month have been trading relatively sideways. Investors have come to terms that the US economy may be heading towards a recession, and that makes every datapoint that more important. As the next FOMC meeting is only 7.5 trading sessions away, the debate of 50, 75 or 100bps continues to rage. This week alone has seen a shift towards 100bps (75bps still is the favorite) as CPI and PPI were higher than expected.

As the 150th British Open kicks off at St. Andrews today, it brought back memories of the good fortune my friends and I had a few years back when we secured a tee time at the Old Course. You don’t know nerves on a golf course until you’ve teed off in front of a massive crowed, even at 6:30am, while sporting a double-digit handicap. Maybe that first drive went OB but our cigarette-rolling/drinking whiskey out of a flask caddie soon calmed our collective nerves.

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.

Inflationàcorporate balance sheets à the Fed. All intertwined and all coming soon to shed light on a market that’s been on unsteady legs once again. Caution was the name of the game, nobody was feeling too brave ahead of CPI tomorrow morning, especially if one had done so last month. The S&P traded lower into the print back in June and a hotter than expected figure resulted another aggressive sell-off, so no reason to be a hero today. Especially considering the number is expected to be higher than last month, with a 9 handle being whispered. And even THAT may not be the end of it, potentially making a mockery of the phrase “peak inflation.”

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.

Yup, that’s four days in a row for those of you counting. 2022 has been a tough year for markets, so accomplishing four green days consecutively is a win. By the way, this was last done in March for the S&P and Nasdaq. With little new news to change the short term positive momentum, traders stuck to this week’s themes, buying growth/ mega tech. The Growth versus Value trade has outperformed by 4% since last Friday (for the S&P), and a few big tech names have closed above their 50 day moving averages (Apple, Amazon, Google and Microsoft). While the broader indexes remain below their 50 days, those levels are within striking distance. Today’s session had most sectors higher.

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.

Well there was no easing into the week after the holiday so hopefully whatever BBQ and subsequent meats and drinks you indulged in didn’t have you too sluggish because there was no rest for the weary. The mood remains an unsure one, with a recap from our inimitable Charts guru post his 2-week roadshow in the US suggesting many investors feel the recession is already here.  It’s no longer a question of if but ‘how deep’ and for ‘how long?’ That does remain to be seen but surprisingly, even with the gloomy sentiment, something is amiss in the market these days. The Treasury bond volatility measure hit a 12m high last week, the FX Vol index did the same a few weeks ago; yet we’re not seeing nearly the same from the equity side of things. That recessionary mindset seemed to be at play early on, with equities sinking across the board. But the S&P recouped more than 2.5% from early lows to finish just barely in the green. The Nasdaq had the same chart and a much higher base, finishing far ahead on the day while energy was another story altogether.

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.