Bond Yield Peak
July 31, 2023
Ten year yields still look like they peaked last October at 4.2%. A new high in the 10-year yield would take equities lower, where a move to ~3.5% would likely drive the S&P 500 (SPX) to a new all-time high. Lower yields from here would come from further evidence of disinflation. Factors driving our dovish view on inflation include a weak China inflationary impulse, continued supply chain normalization and lack of US money supply growth. US money supply growth has been in outright contraction since November. Contracting money supply and continued supply chain normalization sounds like too few dollars selecting from too many goods.
Near-term: In the near-term, any softening in labor markets (Friday’s Jobs Report) or cooling of inflation data (CPI on 8/10) will still be viewed in the context of a soft landing. Evidence in favor of a soft landing will likely drive incremental rerating in equity multiples to a test at 4790. Unfortunately, a soft landing scenario remains a low probability event. A Fed policy mistake could also drive yields lower, but stocks wouldn’t react favorably under that scenario. It takes time for the China deflationary impulse, supply chain normalization and contracting money supply to make an impact on core US inflation. An inline core CPI print on Wednesday, August 10 could produce a pullback into the Fed’s Jackson Hole summit on 8/24-8/26. Recall that last year’s Jackson Hole address was a hawkish surprise given ‘easing of financial conditions.’ And financial conditions are easier today than they were last August. A hawkish Jackson Hole address would result in an equity market pullback and set up the September Fed meeting as a potential positive catalyst. An announced end to the hiking cycle would result in curve steepening as front-end yields fall. Regardless of how we get there, a peak in nominal bond yields should lead to growth stock outperformance. A peak in real yields would lead to accelerated outperformance in Tech. Ten-year real yields currently sit at +155 and we’d expect obvious Tech leadership to kick in below +140bp.