Wall Street: Market watchful of potential third inflation misstep

A cautious end to last week for US stock indices as stronger-than-expected consumer sentiment data dampened enthusiasm that the Fed was set to end its rate-hiking cycle at next week's FOMC meeting.

The University of Michigan Consumer Sentiment Survey increased to 72.6 in July (from 64.4) to its highest level since September 2021. Both current (77.5 from 69) and future expectations (69.4 from 61.5) increased, as did one-year inflation expectations, which ticked higher to 3.4% from 3.3% in June.

The yield on the US 2yr rebounded by 14 bp to 4.77%, reversing a good chunk of last week's post-CPI slide.

Q2 2023 earnings season in focus

After being wrong-footed on inflation twice before, once in July and again in Q4, the market can ill afford to get it wrong for a third time. Since last week's downside inflation surprise, Fed Speakers have been quick to note that while inflation is heading in the right direction, it's still too early to exchange backslaps and high fives.

Hence while the focus for stock indices in the coming weeks will be on Q2 2023 earnings season, the incoming macro data should not be overlooked. The most important of which this week is Retail Sales for June, released on Tuesday night.

What is expected for US retail sales

Headline Retail Sales are expected to rise by 0.5% in June from 0.3% in April.
The Retail Sales "control" group, which excludes food, autos, petrol and building materials, is expected to have increased by 0.3% MoM vs. 0.2% prior.

S&P 500 technical analysis

In last week's update, our central case was for a deeper pullback leaning against a potential double top at 4500, "aware that a sustained break above 4500 indicates the uptrend has resumed towards 4600/4630."

The softer-than-expected CPI on Wednesday night sent the S&P 500 surging through resistance at 4500. While we aren't overly keen to chase last week's rally at cycle highs, neither are we eager to fight the momentum, despite the appearance of a loss of momentum candle in Friday's session. As such, we are neutral at current levels and prefer to buy a corrective pullback in the sessions ahead.

S&P 500 daily chart

Nasdaq technical analysis

A similar story for the last week, our central case was for a deeper pullback leaning against 15,475, aware "that a sustained break above 15,475 indicates the uptrend has resumed towards 16,000."

The softer-than-expected CPI on Wednesday sent the Nasdaq surging through resistance at 15,475, and while we aren't overly keen to chase last week's rally at cycle highs, neither are we eager to fight the momentum, despite the appearance of a loss of momentum candle in Friday's session. This leaves us neutral at current levels with a bias to buy a corrective pullback should it occur.

Nasdaq daily chart

Dow Jones technical analysis

As noted last week, the Dow Jones chart is littered with several highs this year between 34,250 and 34,600, each a failed attempt to break above the December 34,712 high. The latest of which was last week's 34,586 high.

While another attempt remains possible, caution is warranted and should the Dow Jones see a sustained break below support at 33,600/50, it will likely see the decline extend towards the 200-day moving average, currently at 33,084. This level needs to hold to avoid a deeper pullback towards the May 32,586 low with scope to the banking crisis March 31,429 low.

Dow Jones daily chart

• _{TradingView: the figures stated are as of July 17, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}