Record Highs Contend With Volume Restraints, US Inflation Top Event Risk Ahead

US indices have led sentiment to fresh highs this past week even as the fundamental backdrop struggles to present a solid foothold. Will thin liquidity aid or hamper the swell and what does the event risk ahead propose?    

Talking Points:

• The S&P 500 led a charge to fresh record highs as near-term, expected volatility readings collapsed to holiday levels  
• August carries the lowest seasonal volume of the calendar year, which begs the question: how much bullish traction can be found with limited participation?    
• The traditional macro influence this week is ‘medium’ with top event risk encompassing US CPI, UofM confidence, Chinese earnings, IEA’s global oil report and more   

 

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A Fresh Record High…But Where are We Sourcing the Confidence?      

There was little doubt that risk appetite managed to extend its reach this past week. Among the US indices, the S&P 500 took the symbolic lead with a 3.6 percent rally over the period that pushed the benchmark to fresh record highs, overtaking 7,600, on the biggest week’s rally in five months. With headlines this past week indicating the US-Iran ceasefire was holding, the Fed has reasonable data to cool rate hike pressures and criticism over AI infrastructure spending was easing; there were footholds for bulls to justify their reach. How much ‘relief rally’ is left in geopolitical uncertainties and monetary policy forecasting? Is AI regaining its mantel as a transformative technology for the economy and value creation? Those questions are open to interpretation and may simply constitute justification after the fact, but record highs – which require record cost to add to exposure – naturally draws greater scrutiny.

Chart of S&P 500 with Weekly Rate of Change and VIX – VIX 3 Month Spread (Weekly)

Source: TradingView.com; John Kicklighter

 

When it comes to sentiment as the foundation for market progress – versus a definitive theme or catalyst – success is generally correlated to breadth. It is rare that one subset of risk-oriented assets can continue to advance while broader markets are struggling and there aren’t solid, unique fundamentals to justify the outperformance. On this front, there is reason to be somewhat cautious on how much enthusiasm there is for establishing traction. While there seems to be a general ‘risk on’ bearing across the global markets, there isn’t nearly as much indulgence for progress from other regions or asset classes. The VEU ‘rest of world’ equity ETF hit a record high weekly close, but this wasn’t a norm amongst the major global indices. Meanwhile, emerging market, high yield fixed income, crypto and carry benchmarks barely registered positive performance on the week – much less record or even near-record highs. There will always be outliers, but it is unlikely that a drive can be sustained without foundational conviction to power the drive.  

Risk Appetite Spectrum Measuring Direction and Intensity of Sentiment

Source: John Kicklighter

 

The Real Challenges for Sustaining Momentum    

Where a lack of breadth and added scrutiny around record highs are potentially limiting factors, there are genuine headwinds that the cautious bulls – or opportunistic bears – should be tracking. One of the most pressing challenges is determining what fundamental guide the markets will lash its ship. Leveraging news trends via Google as a measure, we are coming off a peak in ‘earnings’ interest. That is remarkable given that it came the week after the core Mag 7 companies reported – with generally disappointing initial responses that they subsequently recovered from. We have some corporate reporting ahead (including Nvidia towards the end of this month), but we are definitely on the off ramp for the season. Meanwhile, the headlines around US-Iran tensions and monetary policy have the capacity to feed further discount recovery, but the former has drawn a serious depth of ambivalence from the market and it remains to be seen how much premium can be extracted from throttling nascent rate hikes. Meanwhile, the threadbare interest around tariffs and trade wars only carries a negative potential with markets. The only familiar theme with outright bullish potential is a resurgence in AI speculation, but it may be a high bar to rouse the blind bid back to life.    

Worldwide News Search for Key Themes Via Google Trends

Source: Google Trends; John Kicklighter

 

If we fail to fix onto a clear theme to inspire conviction – or, less likely, to find the kismet of a concert of drivers that happen to align to distinct bullish or bearish progress – we are more likely to revert to market norms. Where the performance of a benchmark like the S&P 500 through the month of August (essentially unchanged over the past three-quarters of a century) is a product of variable and offsetting year-to-year instances, participation or volume is a more consistent foundational factor. On a trading-day adjusted basis, the month of August has established the lowest relative volume of the calendar year for the index – even more reserved than the year-end holiday period of December. If the markets are naturally questioning the ability to progress at already-record highs, the perception of a thin market will do little to favor bulls. Adding a structural consideration to this seasonal assessment, however, the 13 and 26-week (3 and 6-month) average volume for the S&P 500 stands around 5.7 billion shares, around the highest levels in 9 years.

Chart of S&P 500 Performance and Volume Seasonal Norms by Month

Source: Standard & Poor’s; John Kicklighter

 

Some Unusual Scheduled Event Risk and Few Potent Leaders     

Looking at the scheduled global macro calendar for the coming week, there are a range of listings that are important to interpret into the fabric of the broader market; but there are few stands outs that seem capable of catalyzing meaningful volatility in deep markets. Regionally, the US seems to be the most likely to find event-derived volatility due to its markets’ relative heights and releases like the July CPI update. For thematic-oriented processions, earnings will house few American standouts (though there is Applied Materials) but some top Chinese firms are due to report. Cutting through the back-and-forth in US-Iran headlines, the IEA’s monthly global oil report will present tangible figures. Monetary policy will also have a modest presence between the US, Chinese, Japanese, India and Brazil inflations reports…not to mention the expected RBA rate hold.  

Calendar of Major Macro Economic Event Risk
 
Source: John Kicklighter

 

US Inflation Pressures Take Center Stage after NFPs Miss   

For top, singular event risk over the coming week, the July consumer inflation readings for the United States due before the New York Wednesday are the statistics to watch most closely. Though new Fed Chair Kevin Warsh has spun up task forces that may very well alter the stated mix of the group’s mandates or the data feeding into that monitoring, we are still operating with a focus on natural full employment and a consumer inflation rate of approximately 2 percent. The Federal Open Market Committee (FOMC) hasn’t hiked rates in three years, but some central bank officials and the market have indicated expectation that a move to tighten may be ahead. Yet, those convictions have softened these past few weeks; and particularly after this past Friday’s NFP’s miss. The probability of a September hike dropped from 44 percent from 54 percent the day before the jobs report, and 82 percent (of at least 24bps) on July 23rd. It is noteworthy that while payrolls did contract, the jobless rate did drip back to 4.1 percent. This puts more pressure on the CPI figure to offer a definitive pressure one way or the other. Both headline and core inflation readings softened in June and are expected to tick lower further back in the July reading. So, while these readings are still above the Fed’s stated 2 percent target, the more recent curb in energy prices of late will likely amplify any realised moderation. 

Federal Reserve Dual Mandate Historical Measures: US Inflation and Jobless Rate (Monthly)

Source: US Bureau of Labor Statistics; John Kicklighter

 

The US Consumer and Their Willingness to Spend

Another highlight from the US docket this week is the August update from the University of Michigan’s consumer confidence survey. As it is important to remind ourselves, the American consumer is the largest aggregate engine of growth in the world; so its macro influence is particularly weighty. Over the past couple of months, this sentiment survey has attempted to recover from a record low (44.8 in May) on the backdrop of the on-again-off-again US-Iran conflict ceasefire, moderating energy prices and resilient employment and stock market measures. The economist forecast for this update is projecting a retreat (55.2 to 54.6) in the headline figure, which would not read well in financial headlines. That said, the Friday 14:00 GMT release time will curtail the volatility potential from this report.     

Chart of the University of Michigan Consumer Confidence and ISM Prices Figures (Monthly)

Source: University of Michigan; ISM

 

Keeping a Weary Eye on the Japanese Yen and Markets      

In highlighting a third stand out from the calendar, there is plenty to chose from. The RBA rate decision is the only major central bank due to update, but it is seen holding steady. The IEA’s August report is important but energy prices have eased, so the potency will be curbed. Chinese data (inflation, lending, current account and earnings) are worthy of monitoring, but the source naturally restricts its market impact due to international skepticism. One area where there has been unusual volatility that can in turn amplify scheduled event risk is the Japanese Yen and markets. Following Japan’s efforts at FX intervention and the July 30th dual effort between Japanese and US governments, it has become abundantly clear that there is a serious problem and (as yet) no operable solution. As USDJPY threatens to drift higher yet again, events/data like the Bank of Japan’s Summary of Opinions, EcoWatchers sentiment survey, JGB sales, machine tool sales and factory inflation (PPI) will offer small adjustments to add or remove potentially significant traction.   

USDJPY Exchange Rate Overlaid with the US-Japan 2-Year Yield Spread and Hike Premium (Daily)

Source: TradingView.com; John Kicklighter

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-- Written by John Kicklighter, Global Head of Content