March 31, 2023
The S&P 500 (SPX) is advancing toward technical resistance in the 4100s on strong growth sector leadership. The rotation into growth sectors and Tech in particular is following what looks like a peak in bond yields. Ten-year nominal yields are now at 3.5% with sustained levels below 3.25% confirming a peak for this cycle. Note that growth and Tech multiples are far more sensitive to real yields. Ten year real yields are now at +116bp and we expect the rotation would accelerate at sustained levels below +108bp.
Technical signs of a peak in nominal yields occurred two weeks prior to SIVB and SBNY headlines. Market signals usually lead headlines by a matter of weeks. Deeply oversold 10-year Treasury prices and momentum divergences during the last week of February were the early signals. Regional bank dislocation should cause a collapse in bank credit creation, slower GDP growth and accelerated disinflation. The Fed tends to end tightening cycles when the ‘real Fed funds’ rate (nominal Fed funds – headline CPI) turns positive. Nominal Fed funds are now 5.0%, which means 5% YoY headline CPI print should encourage the Fed to at least pause its hiking cycle. We expect lower YoY headline CPI prints in the months ahead with increased probability for March CPI to reach the 5% threshold. Unfortunately, getting the SPX and NDX through near-term technical resistance likely requires a full Fed pivot rather than a pause. Given recent Fed comments, a pivot seems highly unlikely without more economic pain. In our view, a positively sloped 5/10 yield curve is the market signal to precede an imminent Fed pivot. The 5/10 curve inversion reached its most narrow spread of -2bp the week after SBNY was seized by regulators. Signs of bank stabilization over the last week have resulted in a resumed widening of the 5/10 inversion to -13bp. Against this backdrop, we expect resistance in the 4100s to cap the rally.