
Morning Notes — Jobs and Catalysts Ahead
Wednesday’s release of Fed minutes is still the main driver of recently higher nominal/real yields and value sector (Financials/Energy/Materials) outperformance.
Wednesday’s release of Fed minutes is still the main driver of recently higher nominal/real yields and value sector (Financials/Energy/Materials) outperformance.
Ten year yields are currently trading at 1.72% with mild resistance in the 1.90%-1.94% range, but the real number is ~2.20% with the potential for ~2.50% over the next quarter or so.
Valuation is a dull instrument for timing the entry and exit of investments. Valuation requires a catalyst to make it matter. In this case, the market is pricing in the end of the pandemic.
Over the past ~2 weeks, markets have been sending a signal that Omicron is the beginning of the end of Covid.
Low volatility, secular growth stocks outperformed into year-end reaching a record high premium to high beta stocks.
The driver behind this week’s rally is a growing belief the Omicron wave will be widespread but relatively brief with infection rates fading in early January, if not sooner.
Light attendance and thin liquidity into a catalyst vacuum typically leads to trend continuation.
The SPX tested near-term support at ~4545 yesterday. A firmer core PCE number could bring a test of stronger, secondary support sits in the 4430-4500 range.
Support for 10-year Treasury yields sits in the 1.35%-1.40% zone with sustained levels north of 1.55% confirming a reversal to higher levels. We see some light resistance in the low 1.70s, but look for yields to reach the 1.90-1.95% range sometime in H1’22.
Crowded positioning in Tech reflects a bias to own secular growth stocks following 12+ years of disinflation that resulted in sub-1% ten year Treasury yields.