April 3, 2023
The S&P 500 (SPX) has moved toward strong technical resistance in the mid-4100s. We expect this range will cap the rally in the near-term without a change in macro fundamentals. A Fed pivot is the most obvious change markets are looking for. Unfortunately, recent Fed comments and the current shape of the yield curve make a near-term pivot highly unlikely. A March headline CPI print near 5% has the potential to encourage a Fed rate pause, but more economic pain is needed to induce policy accommodation. More economic pain seems inevitable as the cost of capital continues to rise, lending standards tighten in the wake of recent regional bank turmoil and US money supply remains in contraction. In our view, sustained equity upside requires a cyclical recovery fueled by policy accommodation and expanding money supply. Bearish equity sentiment and light positioning metrics may partially cushion SPX downside as economic pain unfolds, but we still expect downside. The good news is we expect lower headline inflation to confirm a peak in bond yields, which favors growth over value equity sectors. The 5/10 yield curve has moved back toward support near -15bp with sustained levels above -7bp signaling the beginning of a longer-term steepening trend that usually precedes a Fed pivot by 1-5 months.
The March Jobs Report on Friday is the next major catalyst with the necessary density to impact market sentiment and direction. The report comes when markets are closed, so the relatively quiet week should lead to low volume trend continuation until Monday. Consensus is looking for non-farm payrolls to increase +240,000 vs. +311,000. Next week also includes March CPI on Wednesday and the start of Q1 earnings season on Friday.