June 30, 2023
The S&P 500 (SPX) has been able to keep its upward momentum despite rising bond yields. Over the last six sessions, we’ve seen growth data inflect higher, while inflation data has cooled. Bond yields reflect market expectations about future growth, so the perception is that yields are now rising for the ‘right reasons.’ Improving macro data implies an imminent end to the earnings recession, while the cooler inflation data provides a distant line of sight to the end of the Fed’s hiking cycle.
June Eurozone CPI and May US PCE both a touch better than expected. Headline PCE fell to +3.8% from +4.3% in April, while core PCE ticked down to +4.6% from +4.7%. The +3.8% annualized headline number is the lowest in two years. Eurozone CPI showed similar modest improvement, but neither report is expected to alter central bank behavior in coming months. Consider that US core PCE of +4.6% is still more than 2 times higher than the Fed’s 2% target. The bond market remains priced for another ~35bp of Fed rate hikes.
Major upcoming catalysts include: 1) Fed meeting minutes on Wednesday 7/5; 2) May JOLTs report on Thursday 7/6; 3) June Jobs Report on Friday 7/7; 4) June CPI on Wednesday 7/12 and 5) Fed meeting on Wednesday 7/26.
Ten-year bond yields are about 15bp too low based on near-term Fed expectations and current growth/inflation expectations. Another 15bp would take 10-year yields to 3.95%, which is below the 4.09% level we’ve identified as threatening to equity valuations. Bond yields looked like they peaked last October and further backup from current levels should first be considered as an opportunity to add duration.
Near-term resistance for the S&P 500 (SPX) sits in the 4510-4535 range. At that level, the index would likely return to extreme overbought status, where we’d look for bearish divergence signals to develop.