S&P 500 weekly outlook: CPI, US-Iran Situation and Yields in focus

The S&P 500 fell on Friday to post a flat close on the week. Rising yields and elevated oil prices reminded investors that the macro backdrop is turning challenging. Friday’s US jobs report raised the pressure on the Fed to hike as the report was considerably stronger than expected. All the attention will be on inflation data in this shortened week for US investors, plus the usual suspects of oil and bond yields, ahead of the FOMC rate decision in the following week. Tensions in the Middle East remained elevated during the weekend. We maintain a cautious S&P 500 outlook in the near-term.

 

NFP beat and now the focus is on CPI

 

The headline non-farm payrolls figure jumped to 162,000, well above the 56,000 expected. The previous month’s reading was also revised significantly higher, from a decline of 23,000 to an increase of 21,000, while the net revision for the prior two months stood at 55,000. Taken together, the figures point to a considerably stronger US labour market than recent data had suggested. That combination of stronger employment and relatively firm wage growth has raised concerns that inflation may prove stickier than hoped, increasing the likelihood that the Federal Reserve could raise rates and keep interest rates higher for longer.

 

Due to the Labor Day holiday in the US, this week’s key data releases will be pushed back a bit. The US CPI report is due on Friday as a result and is therefore likely to be crucial for the near-term S&P 500 outlook. We also have PPI on Thursday, a day when the ECB decides on interest rates (likely a hike).

 

As far as the Fed is concerned, well there is a bit of disparity between the Fed Chair Kevin Warsh and Governor Christopher Waller. While Warsh was hawkish at the Jackson Hole summit, Waller not nearly as hawkish and indicated that he wants to see the inflation data before deciding whether to support a rate hike or hold rates steady. That means the CPI release could move the needle and it represents the last major piece of economic data before the Fed’s next meeting.

 

If inflation comes in hotter than expected, markets could increasingly price in a September hike. That would probably put renewed pressure on the S&P 500, particularly if Treasury yields move sharply higher.

 

Conversely, a softer CPI reading could revive expectations of lower rates and provide another catalyst for equities to push higher.

 

US equity indices turned lower on Friday following the jobs report, as Treasury yields moved higher and expectations for a September Fed rate hike increased. Markets are now pricing in roughly a 59% probability of a hike, up from 49% before the jobs figures.

 

Technical S&P 500 outlook and levels to watch

 

The key question is whether the index can maintain its broader bullish structure while navigating the renewed pressure from interest rates in the coming days.

 

 

Last week, the S&P 500 found resistance around the 7,750 area, where it previously sold off from on August 28. This level sits inside the broader 7743 to 7772 area of resistance.

 

The short-term bearish trend line held last week. The index needs to move above that trend line to signal a resumption of the bullish trend following the lengthy consolidation phase that has been taking place on the S&P 500.

 

So, there is a risk that we could see a bit of a pullback, possibly even a correction, if macro risks persist while the bear trend remains intact.

 

Near-term support comes in around 7681, the highs from Wednesday which was taken out during Thursday’s sharpy rally. Below that the longer-term support zone between 7588 to 7620 area comes into focus next. It would be a bearish development if that area were to give way in the coming days.

 

The near-term risks to our S&P 500 outlook remain tilted to the downside following the stronger US jobs report, which raised the prospects of a rate hike from the Fed; continued hostilities in the Middle East, and the resulting rally in oil prices. A hotter-than-expected CPI reading could trigger a more meaningful sell-off, while softer inflation would likely provide some relief.