November 10, 2023
We expect 10-year yields to remain above our 4.48% bullish inflection target for the remainder of Q4. An eventual release to lower yields will be driven by disappointing US growth and lower YoY CPI prints likely in Q1’24.
Equity markets will likely welcome a lower yield environment until payroll growth turns negative or falls below +50,000/month. A ‘bad news is bad’ phase should then result in a Fed policy pivot and eventual cyclical recovery. Economic headlines will be horrible, but equity markets will rally in anticipation of the policy pivot. We keep a tactically bearish outlook on the SPX with the current relief rally capped at ~4430.
The 5/10 yield curve is our indicator of an imminent Fed policy pivot. The 5/10 curve made a double bottom at -36bp in October ’22 and March ’23 with the last two years looking like a maturing base pattern. The 5/10 curve is now in positive territory at +3bp with a move above +20bp likely preceding a Fed pivot by 1-2 months.