Daily Brief - The Big Market Checklist

TLDR

A drop in inflation is long overdue, if one judges by the trend in growth of the last year. This will stabilize market prices and provide support for a rally.

Inflation to 0%?

We often discussed the chart above, based on a Fed model for connecting growth one year with inflation next year.

The model has suggested CPI was due for a meaningful drop in 2022. As we all know, that prediction proved incorrect. In part, that is certainly to blame on the first- and second-order impacts of the invasion of Ukraine.

But the underlying message remains: if one was to use growth as the only gauge for inflation, we should be seeing a drop in prices, not a rally.

And this can eventually happen, leading to a more benign monetary policy and relief in equity markets.

What does the TOGGLE Market Checklist have to say?

The Good: upward PMIs and positive Citi Economic Surprises!

PMIs came out strong at the start of the month, and Citi Economic Surprises turned positive this month. Recession appears averted for the time being.

The Bad: expensive valuations

SPX P/E remains stubbornly above 16x and most importantly we really don’t like that Equity Risk Premium at the 10y lows of 2.5%

Upcoming: FOMC on Sep 21st

FOMC will meet on Sep 21st, and will likely deliver a 75bp hike. We will see the devil in the detail about the nuances of policy action.

In conclusion?

As demonstrated by price action last Tuesday, we are in range-bound markets. When markets rally, a bad CPI print can nudge them to a 4% intraday mini-crash.

So buy the dips, fade the tops, and expect volatility on days with big policy & economic announcements.

Idea Spotlight: McDonalds

Volatility indicators for MCD:NYSE reached a recent low and historically this led to a median increase in price of 4.42% over the following 3M. TOGGLE analyzed 9 similar occasions in the past to produce the median projection and this insight received 6 out of 8 stars in our quality assessment.

CEO Chris Kempczinski said the burger giant is grappling with violent crime, homelessness and drug overdoses in its Chicago restaurants, and called on city and business leaders to find ways to address the problem