Santoli: June’s jobs report is too strong to feed recession fears, but key inflation data looms

This is the daily notebook of Mike Santoli, CNBC’s senior markets commentator, with ideas about trends, stocks and market statistics. A monthly jobs report that’s far too strong to feed recession fears – featuring wage growth that adds no further momentum to inflation worry – allows stocks to defer to the five-day pattern of morning dips and afternoon rally attempts as the indexes approach tell-tale levels between “just another bounce” and “maybe something more important.” The data can certainly serve several story lines (labor market a lagging indicator, quirky pandemic effects, information that will simply embolden the Fed to stay aggressive for longer) but so far the numbers haven’t dented a fairly calm equity tape. The routine of overnight/morning weakness followed by intraday buying speaks to funds being underinvested/defensively positioned entering the second half. This comes after an historically bleak six months and rare back-to-back down-10% quarters, along with some stabilization in the macro indicators, a crack in oil prices and Treasury yields comfortably below their 2022 highs for now. The index remains in the “counter-trend bounce until proven otherwise” zone, but another 3% will make things interesting. It would get the S & P 500 back up to a key breakdown point and above its 50-day average. This rebound, it should be said, has the advantage of having started at the lowest valuation and dimmest sentiment backdrop of any doomed rally so far this year. Most of the pattern work (persistence of bad returns, extreme bearish sentiment, clusters of intraday volatility, amount of valuation compression in a short time) suggest good odds of solid returns looking out months – with major exceptions being the early 1970s, early 2000s and 2007-2009 payback periods. Much talk that earnings forecasts – which have been resilient – must be too high and revised down. Plausible, at least in pockets of the market. But it’s not a sure thing given good nominal gross domestic product growth and still-healthy household incomes. The 20%+ drop in the S & P 500 plus the slide in the price-earnings from 21x to 16x would seem to have built in some downside profit risk. Leuthold Group here shows that the S & P has typically suffered once forward earnings estimates peak – yet in every prior example the S & P was solidly up in the six months prior to that peak, unlike now. We still need to hurdle next week’s consumer price index data. Fed officials justifying their accelerated rate-hike plans have increasingly anchored their view to unacceptably high headline inflation and survey-based inflation expectations – which both are essentially proxies for gasoline prices. Those have rolled over, but likely not in time to bring June CPI down into a more comfortable zone. Fed path seems well priced for now, but we’ve believed this before. Breadth is so-so on the day, unlike the all-in upside push yesterday. Credit is holding up OK after a good rally yesterday, so a bit less worrisome than corporate-debt spreads looked a few days ago. VIX snoozing toward 25, low end of the post-April range on a summer Friday. Market has struggled but we’re above the intraday lows of May 20, so not a ton of rapid downside over seven weeks. Sapping demand for short-dated downside options plays.