Inside Markets — Hawkish Pivot

Monday’s upside retail sales number (proxy for GDP growth) combined with three consecutive hot CPI prints are now driving increased concern that the Fed will have to make a hawkish pivot sometime in Q3 or Q4.  Fed officials are acknowledging that disinflation has stalled but aren’t ready to declare a change in trend.  Their source of hope likely comes from shelter prices, which have yet to reflect last year’s disinflationary move.  Fed officials also understand that a hawkish pivot from here would generate a growth scare through increased market volatility.  Real yields remain highly restrictive and the path of least resistance for the Fed amid sticky core inflation is to wait it out.  The next inflation catalyst will be March core PCE due on Friday 4/26.

The volume of Q1 earnings starts to ramp later this week with NFLX kicking off mega-cap earnings season tomorrow after the close.  Most of the Magnificent 7 report earnings next week with NVDA not due until May 22.

Most of the upside in the SPX since November has been driven by multiple re-rating as a benign macro environment produced low levels of realized equity volatility.  The SPX is holding onto most of those gains despite the recent increase in bond yields and repricing of Fed rate expectations. In our opinion, the key level to watch on the SPX is 4980 with sustained lower closing levels likely to generate increased downside momentum. Higher bond yields (10-year yields > 4.80%) or higher volatility (VIX > 20) are the most likely drivers of a break below 4980.