Inside Markets — Slowdown Expectations

Equity markets internals reflect rising expectations for an economic slowdown/recession, but credit spreads remain below the recent peak in October. A break above those levels (IG ~55/High Yield ~348) would be an important development for the slowdown/recession narrative. Tariffs are a drag on growth and policy uncertainty (to the extent it continues) will weigh on demand but Q1 real GDP estimates will remain in positive territory until there’s confirmation in labor markets. Friday’s Job’s Report is an important catalyst for markets. Tariff announcements to date (25% on CAN/MEX and 20% on China) could temporarily add to PCE inflation, but that won’t stop the Fed from responding to a material threat to the expansion. Real yields are still highly restrictive and there is ample room for the Fed to ease if necessary.

The SPX and NDX are now short-term oversold following the momentum factor unwind that started in late November. The SPX remains above technical support at ~5770, positioning is neutral and equity sentiment is extremely bearish. The stage is set for a rebound of some kind with equity volatility as a possible limiting factor. The CBOE Equity Volatility Index (VIX) has extended to ‘elevated’ levels above 22. A quick reversal below 20 would clear the way for a more significant rebound and defer/remove the threat of a bearish break below support.