Bond and equity markets
February 24, 2023
Bond markets are larger and more liquid than equity markets, so when there’s a disconnect between the behavior in bond markets and equities, it’s best to overweight the signaling coming from bonds. The bond market has been pricing in increased inflation volatility since the January Jobs Report, while equities remained relatively resilient. Credit markets should also be considered a leading indicator for equities and credit spreads have also been rising since the January Jobs Report.
Outlook: Equities had been relatively resilient to higher terminal rates until they exceeded 5.25%, which was the cycle ceiling implied by the Fed’s December dot plot. Terminal rate expectations are now back in the driver’s seat with today’s small uptick pushing the S&P 500 (SPX) below its 50-day moving average. At the moment, the index is trading above its 200-day moving average at 3940, which CTAs and other systematic funds use as a trading trigger. Expect levels below 3940 to produce a small increase in selling momentum. The bearish reversal in the SPX from technical resistance in the 4100-4200 range fits our tactically bearish outlook for a potential retest of last year’s low. A successful retest of the October low of 3550 implies ~10% downside from current levels and levels below 3880 would confirm a bearish near-term trend. Catalysts next week include ISM manufacturing on Wednesday and ISM services on Friday.