April 11, 2023
It’s a relatively quiet session as market participants wait for directional clues in tomorrow’s CPI report and Fed meeting minutes. Bond markets remain priced for a 25bp May rate hike and ~60bp of rate cuts through January ’24.
The S&P 500 (SPX) has moved into a cluster of technical resistance in the mid-4100s, which should cap the rally in the near-term. The index is now in short-term overbought territory as the fundamental backdrop remains challenging. Leading economic indicators all point to slowing growth, while the Fed remains focused on lagging inflation data and promises further tightening. The Fed was behind the curve on starting its tightening cycle and now has little choice but to remain there. The Fed’s QT operations have drained bank deposits, and all segments of the yield curve are inverted. The most compelling support for equity markets seems to be that everyone is already bearish, equity positioning is light and sidelined cash is at a record. The most recent CFTC data also shows that net short positions in S&P 500 e-mini futures have increased to the highest level since November 2011. The near-term pain trade is aimed higher into a catalyst-rich week that starts tomorrow morning with the release of March CPI. A more-dovish CPI print is the type of catalyst that would threaten the upper bound of the resistance range at ~4200. Consensus is looking for YoY headline CPI of +5.2% and a core rate of +5.7%. In our opinion, getting through the 4200 level requires an imminent Fed pivot, which should be preceded by a positively sloped 5/10 yield curve. As we noted, all segments of the yield curve presently remain inverted.