May 4, 2023
This morning, the 5/10-year yield curve flipped into positive territory for the first time in 9 months. A positively sloped 5/10 yield curve is our early signal of an imminent Fed pivot and catalyst to add equity exposure. Unfortunately, intraday levels don’t count and the curve now needs to sustain and confirm a positive slope by moving above +9bp.
The pricing of a potential US sovereign credit rating downgrade may have already begun with gold prices and implied equity volatility higher for a third straight day. Equities and bond yields are also lower, but it’s harder to fully attribute these moves to the perceived debt ceiling stalemate. Any agreement that ends with less fiscal spending will be positive for equities. Increased fiscal spending has contributed to the post-pandemic inflation boost and less spending would theoretically allow the Fed to pivot sooner. The Fed’s 500bp of rate hikes in 13 months caused the regional banking crisis, and an eventual pivot is the only way to reduce pressure on these businesses.
The bearish momentum divergence seen on 4/20 and 4/21 has another week of forecast value. Pattern support for the S&P 500 still sits in the 4010-4040 range. A break below 4010 will likely result in accelerated downside momentum to the next support level near 3760.