Beige Book and Consumer Flag Disinflation Pressures Ahead of Today’s CPI Report

The consumer backdrop looks fragile

Highlights

• Harris gains an edge over Trump — are markets paying attention?

• Consumer backdrop looks fragile…

• … as the credit cycle turns and households take on more “deal seeking” behavior

• The Fed’s Beige book continues to point to disinflation

While We Were Sleeping

Volatility was the order of the day in yesterday’s trading session. The S&P 500 saw an intraday high to low swing of -1.0%, before recovering and closing the day up by +0.4% driven by dip-buying in the Tech sector. The Nasdaq went on a roundtrip, too, falling -1.3% from the intraday high to low to start the day and then recovering and closing the day up by +0.8%. This was a second consecutive day of gains on the Nasdaq after the index failed to do so for three weeks.

The good news pretty much ends there as the day was full of risk-off moves beneath the surface, ranging from a decline in commodities (CRB commodities index down -1.5%) to Financials (-1.0%) to a -50 basis points decline in the Transports/Utilities relative strength index. High yield spreads also gapped up +12 basis points, to 332 basis points, while bonds rallied as investors moved into safe havens.

Coming back to Financials, JPMorgan saw its worst session in five months, falling -8.3% for the day at one point (closing down -5.2%). This reaction came as the bank pushed back against lofty analyst expectations. This weighed on the Banks more broadly, with the S&P 500 Diversified Banks Index closing down -3.0% for the day.

The warning from JPMorgan just goes on to prove the point we have been making for a while, that the rally in the S&P 500 has been sentiment-driven with the price action and overall earnings estimates getting ahead of reality. Even easing capital regulations for banks, translating into a 9% capital hike, which was lower than originally planned, could not save the day (however, we do recommend a read of How Wall Street Won ‘Capitulation’ From The Federal Reserve On New Bank Rules in the FT).