The NASDAQ 100 (NDX) is up +1.70% this morning, outperforming the S&P 500 (SPX) by ~120bps based on: 1) recession concerns following Friday’s relatively soft ISM report and increased expectations for a 50bps rate hike in May
The stagflation narrative gets a small boost from today’s lower than expected March Unemployment Rate ( 3.6% vs. 3.7%) as the Fed could reference the number as justification for increased rate hikes.
We’ve pushed back on the recession signal quality of Tuesday’s curve inversion, citing the steep upward sloping real yield curve as a more accurate measure year-forward growth expectations.
We’re in the camp that questions the recession signaling quality from yesterday’s 2/10 nominal yield curve inversion.
The nominal 2/10 yield curve is very close to inverting, which should drive more reports of recession signaling and warnings for equity investors.
The 5/30 year yield curve inversion has started a Fed policy mistake/recession signaling narrative, particularly since the last 5/30 curve inversion took place in early 2006.
The March 16 Fed rate hike acted as a clearing event to gradually unwind the uncertainty discount preceding liftoff. The S&P 500 has recovered about half of its pre-liftoff drawdown and realized equity volatility has come off its peak.
Notwithstanding unscheduled Russia/Ukraine developments, the calendar looks fairly quiet until CQ1 earnings season kicks off on 4/13. A lack of meaningful catalysts generally leads to trend continuation.
Light positioning and extreme bearish sentiment keeps near-term equity market risk skewed to the upside. The usual internal signals that appear toward the end of a bullish phase weren’t present in the runup to the January correction.
The financial press will likely be focused on curve flattening in the months ahead, and it’s signaling for an eventual recession. We expect more curve (2/10 and 5/30 curves especially) flattening in the medium-term driven by reduced GDP growth rates, lower neutral policy rate (~2.5%
