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Inside Markets — Events to Come

Cyclical Recovery?

March 5, 2024

The most significant events of the week are still to come with: 1) Powell’s testimony tomorrow and Thursday; 2) ECB policy decision on Thursday; 3) AVGO and MRVL earnings (check on AI optimism) Thursday after the close and; 4) the February Jobs Report on Friday.  Powell’s testimony will generate a lot of interest, but his comments on interest rates are unlikely to be any more hawkish than what Bostic said yesterday.  Powell is more likely to discuss a plan to slow the pace of QT given the Fed’s reverse repo balance (liquidity) continues to shrink. The balance fell to ~$439.8B yesterday. We see AVGO/MRVL earnings and Friday’s payroll number as more significant catalysts.

Ten-year yields bullishly reversed near resistance at ~4.35% with current levels breaching near-term support of ~4.16%. A close below ~4.16% should put the benchmark 10-year on a path back to the mid-3.90s where bond prices will likely consolidate gains before yields release to lower levels by the summer.

A relatively benign macro environment since November has led to low realized volatility and a high SPX forward earnings multiple of 20.5x. The ‘benign’ macro environment has been characterized by falling inflation, resilient growth and Fed intentions to ease policy. The SPX can only sustain a 20.5x multiple as long as the macro environment remains benign and realized equity volatility (VIX) remains subdued. The benign macro environment has recently been challenged on all three fronts but remains intact for now. However, another hot inflation print or surprisingly weak growth number will send volatility higher and the SPX lower. The CBOE Volatility Index (VIX) is higher today but remains subdued at 14.6. VIX levels north of 20 will become a headwind for the SPX, which keeps its bullish trend at levels above ~4800.

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