Morning Notes — Bond Yields
September 29, 2022
Bond yields: Higher global bond yields put renewed pressure on equities after the new UK PM and Chancellor unveiled energy price caps/stimulus package (£220B) and series of tax cuts (£45B) last Friday. Fiscal stimulus during periods of elevated inflation only makes matters worse and stimulus without revenue offsets will add to UK debt and pressure yields higher. Yesterday, the BOE announced a temporary bond buying program (QE) to stabilize bond yields. Recall the Fed, BOE and ECB all recently announced plans to end QE in an effort to quell inflation. The next BOE meeting will be held on 11/3 with consensus expectations now looking for a 175bp hike followed by another 100bp in December. There’s a government assessment meeting on 11/23, where the government has an opportunity to demonstrate a more prudent approach and limit the amount of tightening required by the BOE.
SPX: The S&P 500 (SPX) is in deep oversold territory (combination of breadth and momentum) and equity sentiment/positioning indicators are at bearish extremes. Terminal rate expectations have been the determinant of market direction since late-Q1 and peaked at 4.86% last week with yesterday’s 10.4bp decline to 4.43% driving the equity rally. The S&P 500 is in deep oversold territory with a combined breadth and momentum indicator suggesting an imminent rebound. The timing of the rebound will likely be preceded by base building and momentum divergence (preferred) or come after a capitulation sell-off. We remain focused on levels in the 3500s as a key area of support with a capitulation sell-off likely crossing below that level before an intraday reversal. A reversal that follows base building and momentum divergence is preferred because it allows a little more time to add exposure. An expected rebound or reflex rally faces some resistance at 3900 and more significant resistance in the 4150-4200 area. Getting a through ~4200 likely requires lower realized inflation with next Friday’s September Jobs Report and the 10/13 CPI report in focus. Other, less significant inflation-linked catalysts in the meantime include August PCE (tomorrow) and August JOLTs report (10/4). Of course, a more lasting recovery requires a Fed pivot, which will show up in terminal rate expectations (OIS forwards market) months before the expected March pause in rate hikes.