SPX shows bullish momentum

Derek Wee

THE S&P500 Index (SPX) is down 14 per cent year-to-date (YTD), closing at 4,072.43 on Jul 28, 2022, and is out of the bear market but still in correction territory. The Nasdaq 100 Index (NDX) on the other hand closed at 12,717.87, marking a YTD decline of 22 per cent, continuing to linger within bear territory. On a monthly review, both indices are poised for their best months this year. The SPX and NDX are up 7.5 per cent and 10.5 per cent, respectively, month-to-date.

Inflation

Energy price remains to be the main contributor for inflation, impacting both consumers and producers alike. The recent release of the US June Consumer Price Index (CPI), an inflation gauge, rose 9.1 per cent year-on-year (YOY). This was higher than the previous month’s figure of 8.6 per cent and also higher than market expectations of 8.8 per cent. The biggest annual spike came from petrol prices which increased 59.9 per cent. However, if we were to exclude food and energy prices, core CPI rose 5.9 per cent, a deceleration compared to the previous month’s 6 per cent increase. Looking further, the recent retail sales for June increased by 1 per cent, reversing from the 0.1 per cent decline in May 2022. On an annual basis, retail sales increased by 8.4 per cent in June 2022, a higher increase than the 8.2 per cent annual increase seen in May 2022. Petrol prices, which represents 10 per cent of retail spending, rose 3.6 per cent monthly and 49.1 per cent annually.

On the producer side of things, the US June Producer Price Index (PPI) increased 11.3 per cent annually, higher than the previous month’s figure of 10.9 per cent. Over half of June’s PPI increase was due to petrol prices, which jumped 18.5 per cent. Excluding energy, food and trade service, the core PPI rose 6.4 per cent annually, a deceleration from the 6.7 per cent seen in May. Over the past weeks, oil was traded at a lower price of around US$ 100 per barrel providing some relief for July’s data expectations.

The reduction in oil prices along with the deceleration of core inflationary figures (core CPI and core PPI) provide a sense that inflation could have peaked and we might see more nuanced figures moving forward.

Inverted yield

In an effort to tame inflation, the Fed increased the interest rate by another 75 basis points (0.75 per cent), hiking a total of 1.5 per cent in 2 months. The previous increase was at their June meeting this year. This brings the benchmark funds rate (the primary credit rate) at the banks into a range of 2.25 per cent to 2.50 per cent.

During the speech, chairman of the US Federal Reserve Jerome Powell briefly signalled that another 75-basis-point hike could happen in September 2022 depending on the economic climate. Suppose the Fed were to continue its 75-basis-point hike in September this year and subsequent 50-basis-point hikes in its November and December 2022 meetings, the rates could reach into a range of 4 per cent to 4.25 per cent by the end of this year. Investor sentiment is reflected in the US 10-year Treasury (US10Y) and 2-year Treasury (US2Y) spreads which have remained negative since Jul 6, 2022. An inverted yield curve signals that demand for longer-term bonds are higher than shorter-term bonds. This could be due to rising short-term expectations of tighter monetary policies to tame inflation. The yield curve between the US2Y and US30Y was also briefly inverted on Jul 14, 2022.

Quarterly GDP

The US reported second quarter 2022 GDP figures of negative 0.9 per cent, below expectations of a 0.3 per cent gain. This marks its second quarterly decline after falling 1.6 per cent in the first 3 months this year. A common definition for recession is 2 consecutive quarters of negative growth. However, investors should also note that the National Bureau of Economic Research attributes recession to a broad range of data in areas like industrial production, employment, real income and wholesale-retail trade.

Looking ahead

The current market narrative is wrapped around persistent inflation and the Fed triggering a recession due to its monetary tightening policy. The upward squeeze on prices is mainly supply-side driven which can be attributed to the Russia-Ukraine conflict and the zero-Covid policy in China. As such, consumers will continue to experience rising cost pressures even as they reduce their discretionary spending. Separately, as the Fed continues to increase interest rates, we can expect further slowdown in business activities as businesses navigate between the pressures of both rising costs and borrowing costs. The result would be a further reduction in economic growth. The International Monetary Fund recently downgraded the US 2022 GDP figure from 3.7 per cent to 2.3 per cent due to the reduction in household purchasing power and tightening monetary policy. Unless there is a change in the factors affecting prices, businesses can expect further pressures, negatively affecting the SPX, as consumer spending decreases, and both business costs and borrowing rates increase.

On a technical perspective, the SPX is looking to set its highest monthly performance this year with a 7.5 per cent increase. The index is currently trading at its 100 days Exponential Moving Average (EMA) at 4,079. The index has been on the rise since Jul 14 after the announcement of the US CPI figures. The current Relative Strength Index 14 days (RSI14), a momentum indicator, is at 62.61 and is looking to climb towards the 70 levels. The SPX index also broke above its descending triangle on Jul 19, heading towards its short-term resistance level of around 4,177 which references the consolidation seen in June this year. The index trading at the top end of the 20 days Bollinger band looks to stretch the band further. The Bollinger band is a momentum indicator that depicts two standard deviations above and below a simple moving average. The current short-term support level is at 3,740, which saw the index rebounding off in June 2022. A break above resistance could see the index heading towards 4,390 and a break below support could see it heading towards 3,580.

The writer is strategist at Phillip Nova