Inside Markets — Commodities

The relatively muted reaction in commodities means that geopolitical headlines had little to do with yesterday’s sell off in equity markets. Instead, the sell off was triggered by the move higher in yields following a strong retail sales number. High-touch trading desk commentary suggests yesterday’s selling mostly came from systematic funds like CTAs rather than long-only managers and hedge funds.  CTA’s use very simple triggers like moving averages (MA) with ~$10B in selling volume coming after the SPX crossed below its 50-day MA.

March retail sales beat expectations with upward revisions to previous months. Total nominal (includes upside in prices) sales increased +0.7% MoM in March while sales of the control group (basically core retail sales) rose +1.1%. One month doesn’t make a trend, but the March increase for the control group was the largest monthly gain in over a year.

Ten-year yields extended through technical resistance near ~4.58% yesterday but short-term price indicators have yet to reach oversold extremes.  Ten-year yields have moved into the next resistance layer between 4.66%-4.76% and expect oversold extremes to be a matter of time more than price.  Reaching an oversold extreme at levels below 4.76% would be a logical place to add duration, while a break above 4.80% would likely induce further downside in equity markets.

Ten-year yields moving above 4.80% would likely result in the SPX testing support at 4980. A sustained break below 4980 would challenge the bullish trend and result in an emerging bearish narrative. The break below 4980 would also likely result in higher realized equity volatility.

Subdued levels of realized equity volatility as measured by the VIX index over the last 5.5 months have resulted in a 21x forward multiple (high end of the historical range) for the SPX. Subdued equity volatility was a byproduct of the benign macro environment that included resilient growth, lower inflation and the promise of Fed rate cuts. The last three months of inflation data have come in hotter-than-expected and the benign macro environment is now challenged.  The result has been higher levels of equity volatility with the VIX rising from 13 on March 28 to 19.23 yesterday.  VIX levels above 20 are no longer considered ‘subdued’ and often result in a lower forward multiple for the SPX.

Another upside inflation print would likely trigger a spike in volatility.  The next official inflation report on the calendar is March core PCE due 4/26.  However, we see the report as being sufficiently de-risked by March CPI and PPI.  The price of crude oil will likely serve as our best inflation proxy until we see April data.  On the growth side of the equation, we’ll look at flash PMIs on April 23 to provide direction into the ISM reports due May 1 (manufacturing) and May 3 (services).