Morning Notes — Terminal Rates

Terminal rates: Yesterday’s +5.6% gain in the SPX followed a 27bp decline in terminal rate expectations and sharp increase in expected Fed easing 24 months after terminal rates have been reached.  The OIS forward curve has the terminal rate at 4.88% in May’23.  Twenty-four months forward on the curve implies at 3.52% implies 136bp of rate cuts.  Earlier this week we explained the S&P 500 has been far more sensitive to implied easing priced into the curve two years forward.  Terminal rates fell 27bp yesterday, but terminal rates in May’25 fell 50bp and the SPX reacted as expected.  Bond markets are closed today, but we expect lower nominal 5 and 10 year yields next week. This is a mean reversion trade in bonds, so look for 10-year yields to find support near 3.45-3.50% and 5-year yields down to ~3.65%.

Tech: We expect Tech multiples to remain under pressure until 10-year real yields fall below +0.75%.  Ten-year real yields were +143bp yesterday.  Assuming that 10-year breakeven yields remain unchanged at 2.41% and nominal yields fall to 3.50% as we expect, real yields will only fall to only +109bp.  We’ve been underweight Tech since late last year when it became clear (September 21) that 10-year real yields had made a bottom. We’ll move back to an overweight in Tech when it’s clear that real yields have made a top, which we expect is something under +75bp.

SPX: The S&P 5000 has cleared the first technical resistance hurdle at 3900 and is now faced with stronger resistance near 4100 including a downward sloping 200 day moving average at 4090 and former support at 4110. Getting through those levels requires lower terminal rate expectations and more implied rate cuts 24 months after reaching the terminal rate.  And that requires lower realized inflation with next Tuesday’s PPI and the November Jobs Report on 12/2 as logical catalysts.  For now, we look for the index to trade between 3900-4100.