Terminal rate expectations are down -12.1bp this morning to 4.41% and are still the dominant cross market for equities. Terminal rate expectations are derived from the Overnight Index Swap (OIS) forward market and levels below 4.50% should provide broad support for equities.
Near term outlook driven by a calmer tone following reports that UK PM Truss and Chancellor Kwarteng are holding an emergency meeting today with the Office for Budget Responsibility (OBR).
Higher global bond yields put renewed pressure on equities after the new UK PM and Chancellor unveiled energy price caps/stimulus package (£220B) and series of tax cuts (£45B) last Friday.
Terminal rate expectations are in focus as lower bond yields follow the BOE’s announced bond purchase program that erases about half the yield backup since Friday’s controversial stimulus rollout.
The S&P 500 (SPX) is in deeply oversold territory and susceptible to another reflex rally in the 10-15% range. Internal breadth indicators show only ~3% of SPX stocks trading above their respective 50-day moving average and only ~11% of members trading above their 200-day moving
The S&P 500 (SPX) has lost ~5.3% since the September Fed policy statement and press conference where Powell mentioned ‘pain’ six times. Looking only at the updated dot plot, we can expect the rate hikes to end in January at 4.50% Fed funds (now 3.25%)
The S&P 500 (SPX) has returned to deeply oversold levels and now testing June lows at ~3660 with long-term valuation and technical targets just underneath in the 3500 handles.
Equities closed lower after a more hawkish dot plot (median ’23 dot of 4.625% pushed terminal rate expectations higher) and increased recession worries on Powell’s warning about economic pain.
Consensus is looking for a 75bp hike and hawkish press conference where Powell stays focused on remaining inflation risks. In addition to today’s rate hike, markets are also currently priced for 75bp in November and 50bp in December.
Over the past week, we’ve received negative Q3 earnings preannouncements from DOW, EMN, HUN, OLN, F, GE, FDX, ARNC, NUE, FLS, SIVB, MCK, NWL, CHD, STX and Electrolux in Europe.
