March 29, 2023
There was no obvious catalyst for yesterday’s pullback other than the end of Washington hearings on recent bank failures without mention of expanded FDIC insurance. Yesterday’s improved March Consumer Confidence number receives extra attention given the data was collected through March 20, which included a week of regional bank turmoil. Comments from Fed’s Bullard also receive attention, as the official highlights the fact that the central bank has multiple tools to address systemic financial stress and inflation pressures. Reports out of Washington discuss the potential for tougher bank regulations for institutions with more than $100B in assets.
The S&P 500 (SPX) tries to break above 3950-4000 resistance as bank contagion appears temporarily contained and implied equity volatility fades. The index is vulnerable to cascade lower below 4000, while a close above this level opens the door for a retracement into the 4100s. The pain trade should be skewed to the upside as positioning remains light and sentiment has moved back toward bearish extremes. Technical resistance in the mid-4100s should hold unless there’s material change in macro fundamentals. The most compelling change in fundamentals would come from an imminent Fed pivot, which seems unlikely if the market believes bank contagion is contained. A positively sloped 5/10 yield curve is our market-based signal for an imminent Fed pivot. The 5/10 curve inversion narrowed to -2bp late last week but has widened back to -11bp. Fed officials are also back to endorsing ‘macroprudential measures’ to address financial stress and monetary policy to address inflation. This may imply tighter regulations for banks and simultaneous tightening of monetary policy. Yesterday, we explained the Fed only ended past tightening cycles when the ‘real Fed funds rate’ moved into positive territory. At the current Fed funds rate of 5%, achieving a positive real rate would require YoY headline CPI to fall below +5%. Headline CPI in February was +6%, which makes the March CPI print on Wednesday April 12 the most important near-term catalyst.