May 8, 2023
The debt ceiling ex-date has been pulled forward by ~2 months due to lower tax receipts, presumably due to lower capital gains realizations. The new ex-date is assumed to be June 9. The lower capital gains tax receipts were likely the result of negative US equity returns in 2022 caused by higher interest rates to combat higher inflation. The government’s urgent need for a higher debt ceiling is ironic if you attribute increased fiscal spending with higher rates of inflation. A down-to-the wire extension could result in a US sovereign credit rating downgrade like those from 2011 and 2013. Today’s political climate seems most comparable to the 2011 episode when markets began to reflect a potential downgrade about two weeks before the assumed ex-date. In those two weeks, the SPX fell more than 15%, 10-year yields fell ~70bp, gold rallied more than 15% and the dollar rallied ~5%.
Friday’s stronger-than-expected payroll gain, lower Unemployment Rate and higher wages are taking bond yields higher in the near-term. The stronger April Jobs Report deserves attention, as do the large negative revisions to February and March payrolls. This week’s CPI print could take yields a bit higher, but the small backup in yields looks like nothing more than a counter-cyclical move in a developing bullish trend. We see 2-year yields falling below 3.50% and 10-year yields breaking support near 3.20% over the next two months. A 10-year break below 3.20% will confirm the March top in nominal yields, while a similar decline in 10-year breakeven yields will likely keep real yields in a familiar range above +108bp. Ten year real yields holding above +108bp will keep Tech multiples well-anchored throughout the rest of the year. The good news for equities would come from a sustained upward slope for the 5/10 yield curve. We turned tactically bearish on equities when the curve inverted last summer. The 5/10 curve is presently in positive territory with sustained levels north of +18bp key to a bullish equity pivot.
The S&P 500 (SPX) remains underneath technical resistance at ~4200. Bearish momentum divergence signals from late April keep us skeptical of a near-term push through 4200. In our view, a sustained break in the 5/10 curve above +18bp would make an SPX break above 4200 more likely.