Yesterday’s risk-off trade occurred 10 days before the estimated debt ceiling x-date of June 1. The timing of the sell-off matches the timing from the 2011 episode that came down to the wire, but still resulted in a US sovereign credit rating downgrade.
The S&P 500 (SPX) has extended to the upper end of technical pattern resistance near 4200 with thin leadership in mega cap Tech and Comm Services. Thin leadership typically occurs at the end of a cycle and the preference to own the largest stocks is
A short-term extension to August is the most likely scenario given the estimated ex-date of June 1 and time required to produce a bill.
A BofA consumer report for April showed total card spending per household fell -1.2% YoY, which is the first YoY decline since February 2021. The reports showed unemployment rising fastest among high-income households.
A Fed pause is only bullish for stocks when it occurs in a low inflationary environment. We continue to think that a full Fed pivot is required in order to drive the S&P 500 (SPX) through ~4200.
The debt ceiling ex-date has been pulled forward by ~2 months due to lower tax receipts, presumably due to lower capital gains realizations. The new ex-date is assumed to be June 9.
The technical setup for the S&P 500 remains challenging into strong resistance in the mid-4100s. Bearish momentum divergence seen on 4/20 and 4/21 has forecast value for another week. Near-term support sits in the 4010-4040 range.
This morning, the 5/10-year yield curve flipped into positive territory for the first time in 9 months. A positively sloped 5/10 yield curve is our early signal of an imminent Fed pivot and catalyst to add equity exposure.
Two of the three most likely Fed scenarios would likely result in upside for the S&P 500. Though the probability is something under ~5%, the ‘no hike and pause’ scenario would probably result in initial SPX upside of ~1.5%.
The probability for a technical US debt default remains below 10%, but the likelihood for a credit rating downgrade may be fairly high. The debt ceiling has been raised 78 times since 1960 with two recent events that came down to the wire resulting in
