Morning Notes

Prior to 2/24, the relationship between commodity prices, Fed expectations and bond yields functioned normally and the S&P 500 (SPX) found a footing at technical support near 4,100.  

Prices are very oversold, positioning is light and equity sentiment sits at bearish extremes. Valuations are now at reasonable levels with the S&P 500 trading at 16.19x 2023 earnings estimates.

The US economy added +428,000 jobs in April, which was higher than consensus expectation for 380,000.  Non-farm payrolls are now only down 1.2M or 0.8% from February 2020 levels.

Today’s downtick in risk assets mostly reflects an uncertainty discount into tomorrow’s April Jobs Report and next Wednesday’s CPI print.

The market will be focused on: 1) Fed comments around more 50bp rate hikes at upcoming meetings; 2) whether Powell pushes back against a 75bp hike and; 3) color on where the current ~$9T balance sheet will settle.

The cause of all this pessimism is inflation, exacerbated by Russia’s invasion. Prior to the invasion, markets had been responding rationally to elevated inflation prints.

The bearish narrative includes: 1) an aggressive Fed-led global tightening cycle; 2) persistently high inflation data exacerbated by spiking commodity prices following Russia’s invasion of Ukraine and; 3) China’s Covid lockdowns and associated supply chain concerns.

The near-term risk/reward for the SPX remains higher given extreme bearish equity sentiment, light positioning and oversold conditions.  

Technical support for the S&P 500 (SPX) remains in the ~4150 range after holding that level twice during the early- March lows.

We continue to view Energy as a secular opportunity that will play over several years.