February 16, 2023
The no-landing narrative that emerged after the strong January payroll number drives a cyclical recovery theme in equity markets. Over the last nine months, the Fed has reiterated it won’t stop tightening prematurely and will keep rates in restrictive territory for a long time. A cyclical recovery without an accommodative Fed and expanding money supply is extremely unlikely. Prior to the Jobs report, bond markets were fully priced for a Fed-induced recession in the second half of the year, followed by immediate rate cuts, easy policy and expanding money supply.
Equities usually discount events 6-9 months into the future and would look through the imminent downturn to the cyclical recovery ahead. That made sense, but the certainty of a year-end recession is no longer priced into the forward rate curve, meaning the current resiliency in equity markets may be premature. The S&P 500 (SPX) sits in the middle of our technical resistance range between 4100-4200 where we expect a near-term top to emerge. We respect the collective intelligence of markets and would abandon the tactical bearish outlook on a cyclically-led sustained break above the range.
Fed officials continue to sound hawkish after the stronger January Jobs Report and hotter inflation data but make no mention of a need to hike rates beyond what’s suggested in the recent dot plot.
The implied pause in May underpins the recent resiliency in equities with markets paying close attention to next Wednesday’s release of January meeting minutes. Upcoming catalysts before the March Fed meeting include: 1) Powell’s semi-annual Congressional testimony on March 7, February Jobs Report on March 10 and February CPI on March 14.