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Inside Markets — Worst Week of 2023

Worst Week of 2023

February 10, 2023

US equities are mixed with the S&P 500 on track for its worst week of 2023. Energy is the upside standout after Russia’s announced production cut bolsters crude prices. Defensive sectors also outperform, while Consumer Discretionary and Tech sell off after leading the index for the past three weeks. Treasury yields are higher with curve steepening after yesterday’s poorly received 30-year bond auction. The dollar is firmer vs. euro and sterling, but weaker on the yen cross after today’s BOJ Governor nomination. Gold is slightly lower, while crude oil rallies back to two-week highs.

Markets are concerned about a pause or slowdown in the disinflation trend following last Friday’s strong Jobs Report, this week’s uptick in used car prices and one-year inflation expectations. The recent data plus this week’s hawkish Fed commentary has resulted in higher bond yields and bearish repricing of Fed rate expectations. Equity markets have been surprisingly resilient despite the bearish repricing in the bond market.  A similar repricing of yields last year would have generated an immediate and significant drawdown in US equity prices. This would have been especially notable in long duration Tech and Communication Services sectors. These sectors led the SPX over the last three weeks and were among the most resilient until yesterday when the market shifted its focus to next Tuesday’s CPI print.

Weakness into Tuesday would only make sense given how CPI reports generated the greatest amount of bond market volatility last year. By now, we should know that this year is different, and the recent repricing of rates will partially de-risk next week’s CPI print as a source of increased volatility.

From a technical perspective only, yesterday’s close below 4100 increases conviction for our tactically bearish outlook.  And a move below 3890 would result in increased downside momentum and a potential retest of last year’s low near 3550.  We don’t use technical factors in isolation and a break below 3890 requires a fundamental catalyst. The potential for next week’s CPI to be that catalyst has become less likely.  

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