August 29, 2023
Yesterday’s call for lower yields and curve steepening arrives right on schedule with today’s sharp drop in job openings adding extra pressure on front end yields. The 5/10 yield curve inversion narrows to ~15bp today from ~30bp just two weeks ago with a near-term target of negative ~5bp. As anticipated, curve steepening is having a bullish effect on equity markets with long-duration stocks driving the S&P 500 (SPX) higher in the near-term. In our opinion, the 5/10 curve will need to push into positive territory before the SPX can break above technical resistance levels near 4525. This week includes two catalysts with the required density to achieve a positive 5/10 yield curve. The first is US core PCE on Thursday and the second is the Jobs Report on Friday. Going forward, we expect labor market data and ‘super core’ PCE will be the most important inputs for future Fed policy. Core PCE has been the Fed’s preferred inflation measure for decades and ‘super core’ PCE that measures non-housing services inflation is of particular interest now. Unfortunately, we don’t expect July super core PCE will be the catalyst to move yields lower and twist the curve steeper. Of the two, Friday’s Jobs Report has a better chance of delivering numbers that result in lower yields and curve steepening. We look for the 5/10 curve to remain inverted and the SPX to remain below 4525 through Q3.