Good morning! How’s this for impact: Inflation in Europe could be impacted by mega-popular events like Taylor Swift’s tour or the Olympics.

That’s what UBS thinks at least. More on that below.

We’re coming off the most volatile week in markets since the pandemic — today we’re unpacking what comes next.

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Volatility is having its moment

For most of this year, stocks have marched up and to the right without a hitch. 

That’s changed over the last several weeks. Volatility and jitters have returned to global markets as if there’s a score to settle.

Good and bad economic data are finally causing good and bad market reactions, respectively. 

As unusual as this feels compared to very recent history, it’s an instructive reminder that asset prices rarely follow a straight line. 

Indeed, the market today feels particularly sensitive and ready to swing off the smallest catalyst.

“In our view, at the core of the market volatility is the changing market narrative about US economic growth,” Morgan Stanley’s head of fixed income research Vishwanath Tirupattur told clients Sunday.

In his view, weak labor market data has revived recession risks and brought the Fed’s policy into question.

“This contrasts with the particularly rosy thesis that had been baked into market prices, where valuations were already stretched,” Tirupattur said.

Already in August, the S&P 500 has dropped as much as 6% while Japan’s benchmark, the Nikkei 225, crashed by 20% and entered a bear market.

Both indexes have clawed back about half of those losses as of Friday.

At the same time, the VIX — Wall Street’s fear gauge — spiked to 2008-levels during the middle of a trading session just a week ago before falling into a still-elevated range. 

With markets appearing so nervous, traders will be looking for upbeat economic data this week. Anything less could lead to more selling and more nerves about the Fed being late on policy. 

To that point, over the last few days Goldman Sachs and JPMorgan have both raised their forecasts for a recession this year.

The biggest news this week will be the July inflation report, due Wednesday. Analyst estimates see consumer prices rising 3% compared to one year ago.

Traders are positioning for the S&P 500 to swing 1.2% in either direction when the CPI report is released, according to options data cited by Bloomberg.

Other risks to watch: 

• Geopolitical tensions in the Middle East

• More unwinding of the yen carry trade

• Uncertainty around the presidential election 

So yes, markets are more on edge than usual.

Yet the backdrop that’s supported stocks all year hasn’t exactly changed.

The Fed is closer than ever to slashing interest rates and the S&P 500 is still up almost 13 percent eight months into the year. 

“We believe investors shouldn’t overreact to swings in market sentiment,” said Solita Marcelli, the chief investment officer for UBS’ wealth management arm.

“With economic and earnings fundamentals still good and the Fed likely to cut interest rates, our base case-scenario is still for the S&P 500 to end the year around 5,900.” 

For all you math people, that figure represents another 10% rally from current levels. 

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

Elsewhere:

🧮 Could the volatility spike be a head fake? That’s what some market-watchers have theorized since last week. The argument reflects how the VIX itself isn’t actually traded, but calculated based on options activity in the S&P 500. Futures tied to the VIX, derivative traders say, are a better gauge — and they showed smaller moves than the actual fear gauge. (Bloomberg)

📉Consumers need rate cuts. Bank of America’s CEO said everyday Americans could get discouraged if the Fed doesn’t make a move soon. “Once the American consumer really starts going very negative, then it’s hard to get them back,” Brian Moynihan said on Sunday. (Reuters)

🎙️The Taylor Swift effect hits Europe. UBS analysts suggested that the pop star’s ultra popular tour, as well as the Olympics, could bring sudden demand shocks to local economies across Europe. We already have data that shows Swift’s shows boosted hotel revenue in the US cities she visited. The Paris games now are causing a similar phenomenon. (CNBC)

Rapid-fire:

• Amazon, Google and other tech firms aren’t a threat to Nvidia’s AI dominance (WSJ)

• Oil refiners across the US are pulling back this quarters, raising concerns that a glut of crude supply is growing (Bloomberg)

• Barclays analysts cautioned that companies’ massive AI investments harbor a “not-so-hidden” cost of depreciation (Business Insider)

• Adjustable-rate mortgages are on the rise as Americans look for relief in the housing market (ResiClub)

• China will face a tougher US trade war than ever if Trump wins the White House again (WSJ)

Last thing:

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