Developing Bullish Trend
April 17, 2023
The recent backup in bond yields looks like normal consolidation in a developing bullish trend. The term ‘bullish trend’ refers to bond prices, meaning we expect lower yields in the months ahead. Signs of stabilization in the banking sector have been the fundamental catalyst behind the recent backup in yields. Ongoing weakness in macro data will be the catalyst for yields to move lower. Separately, these debt ceiling debates have a tendency to drive yields lower in a flight-to-quality move as the estimated deadline approaches.
The S&P 500 (SPX) faces strong technical resistance in the mid-4100s. In our opinion, getting through ~4200 requires a change in macro fundamentals, specifically a Fed pivot. Levels above 4200 also take the index closer to meeting the technical definition of a bull market, which is difficult to imagine without a cyclical recovery. All cyclical recoveries of the last 40 years have required accommodative monetary policy and expanding money supply. A positively sloped 5/10 yield curve is our market-based indictor for an imminent Fed pivot to policy accommodation. The 5/10 yield curve is now at -10bp and also consolidating gains in a developing bullish trend. Support sits in the -18bp range with a positive slope still possible and likely during Q2. Unfortunately, achieving a Fed pivot probably requires more economic pain and downside in financial assets. A positively sloped 5/10 yield curve will be our first opportunity to add broad equity exposure at lower levels.
Treasury secretary Yellen said tighter lending standards can substitute for further rate hikes into a week that brings scheduled speeches from eight different Fed officials. The bond market remains priced for ~45bp of cuts into year-end, as some attention on the US debt ceiling follows speaker McCarthy’s morning speech at the NYSE and reports discuss ongoing fiscal spending and its impact on underlying US inflation.