Morning Notes

The consumer came into this year with strong household balance sheets and elevated savings rates. Recessions generally require stretched credit conditions and deteriorating labor markets accompanied by mass layoffs.

A sustained rally in equities requires lower inflation breakeven yields followed by lower nominal bond yields and lower Fed expectations.  All three have come off recent peaks, but it started with breakeven yields cracking below 280bps on May 9.

The potential catalyst for a Fed pivot in today’s world would likely start in declining inflation expectations. This puts the focus on 10-year inflation breakeven yields, which broke 280bps last week, staring a broadening top pattern.

The S&P 500 (SPX) is testing last Thursday’s intraday reversal level in the 3,850-3,900 range with the 38.2% Fibonacci retracement level at ~3,840.  Risk/reward remains skewed to the upside with sentiment and positioning at bearish extremes.

The Fed’s increased clarity on near-term policy should help reduce bond market volatility, which usually leads to a narrowing of credit spreads and reduced equity volatility as a result.  

Copper and steel prices typically lead the way on inflation and they’re already negative YoY.  We should begin to see the data start to roll over next month and continue rolling over for the next ~6 months.

Coincidentally, we think that changed last Monday when 10-year breakeven yields moved sharply below support at ~280bps.

We were surprised to see the S&P 500 (SPX) break technical range support near 4,100 amid record bearish equity sentiment and extremely light positioning. It doesn’t take much to rally markets with such deeply oversold conditions with only 15% of the SPX holding above their

Inflation expectations continue to decline with 10-year breakeven yields down to our predetermined support range of 262-265bps.

The S&P 500 will likely stay range bound until there’s a more obvious deceleration in inflation.