Inside Markets — Rate Expectations

This week’s Fed meeting has largely been de-risked due to significant repricing in rate expectations.  The forward OIS curve is now priced for just ~30bp of cuts in ’24.  This week’s inflation-related data including Q1 ECI, productivity and labor costs could add to the narrative, but unlikely to move the needle given that its backward looking.  This week’s batch of Q1 earnings reports and Friday’s payroll data are the catalysts to watch ahead of April CPI scheduled for 5/15.

We’re already about halfway through Q1 earnings season with earnings growth running at about +4.5% vs. consensus estimates for +3%. Enthusiasm for companies beating estimates has been low, while punishment for those missing has been a bit higher than average.  Markets always follow guidance more closely than reported earnings and the performance this quarter is no different.  The other notable trend this quarter has been increased corporate spending with buybacks up ~17% YoY and capex/R&D up ~19%.

The ~5% pullback in the SPX from the March 28 high followed the backup in bond yields.  Equities don’t mind a gradual move in bond yields if it comes from better growth, which was the case during Q1.  The tipping point for stocks is when yields rise more than 2 standard deviations during a one-month period.  In current terms, a 2 standard deviation move in 10-year yields is ~50bp, which was mostly achieved during the 30-days ending April 16.  Historically, a 2 standard deviation backup in yields causes a ~5% pullback in the SPX.

The SPX is still flirting with near-term technical resistance at the 50-day moving average of ~5119.  This level is only significant as a CTA buy/sell trigger with closing levels north of ~5119 helping the near-term outlook.