April 4, 2023
The S&P 500 (SPX) has moved into a strong technical resistance range between 4050-4200 with a challenging fundamental backdrop. Breaking above ~4200 likely requires a change in macro fundamentals, specifically a Fed pivot. The early-March peak in nominal bond yields is being used as a lazy indicator for an imminent Fed pivot. In our opinion, the peak in nominal yields simply reflects increased recession risk as the Fed continues its tightening campaign. A positively sloped 5/10 yield curve, which remains inverted at the moment is our early indicator for an imminent Fed pivot. The peak in nominal yields has also started early rotation into growth sectors with Tech as the primary beneficiary. Tech has led the recent equity rally with the NASDAQ 100 (NDX) facing similar resistance ~3% above current levels in the mid-13000s.
Tech and nominal yields have a negative correlation, but the correlation is far stronger against real yields. The early rotation into Tech makes sense as 10-year real yields have declined from +166bp to +108bp today. Sustained levels below 107bp is our signal that real yields have peaked and will encourage us to add more Tech exposure once risk/reward for the broader market improves.
Today’s early recession trade is also linked to concern that OPEC’s surprise production cut was a preemptive measure ahead of a future collapse in global demand. The production cut was led by the Saudi’s with a well-regarded economics team citing a need to balance supply and demand for the year. The production cut may complicate the Fed’s outlook but the market remains focused on Friday’s Jobs Report and next week’s CPI print in the wake of yesterday’s weaker-than-expected ISM data.