De Facto End
March 20, 2023
A de facto end of the tightening cycle has driven bond yields and kicked off equity rotation into growth sectors and Tech in particular. Tech is the largest sector weight for the SPX with the rotation and light equity positioning pushing the S&P 500 (SPX) back above technical resistance near 3900. Forward-looking inflation measures peaked last summer and continue to signal disinflation in the months ahead. Nominal bond yields have declined a bit faster than inflation expectations, which has helped 10-year real yields fall from an early March peak near technical resistance. Real yields and Tech multiples have a strong negative correlation, but a 36bp decline in 10-year real yields to 130bp has yet to confirm a top. The recent decline in yields has pushed bond prices toward short-term overbought levels, and a period of mean reversion would challenge the rotation in the near-term. Our fundamental view is that nominal bond yields will eventually move lower, and the rotation into Tech will likely accelerate once 10-year real yields confirm a top at levels below 109bp.
The 5/10 yield curve inversion has narrowed to -8bp and into a range that may soon signal an imminent Fed pivot. Sustained levels above -7bp would confirm a technical bottom in the 5/10 curve inversion and our earliest signal of Fed pivot. Historically, the S&P 500 (SPX) has made a cycle bottom 1-5 months after a low in the 5/10 curve inversion is confirmed.