Morning Notes — Bond Yields and Inflation Expectations

Fed: Powell’s central message on Friday was that interest rates may need to stay at elevated levels longer than current market expectations.  The Fed is still expected to stop hiking rates in December at 3.50-3.75% and OIS forward markets are still priced for rate cuts in ’23, but rate cut expectations in the March-July window have narrowed over the last 2 weeks from ~50bp to ~20bp.   
Bond yields: Ten-year Treasury prices reached overbought extremes at the end of July and began a mean reversion trade that now looks mostly complete at ~3.10-3.15%. After a period of consolidation to ~2.90%, there could be another small run into the 3.25-3.33% range, but that should cap things for now.

Inflation: The mean reversion trade that took 10-year yields to ~3.10-3.15% dragged 10-year inflation breakeven yields from ~230bp to ~260bp.  Expect breakeven yields to unravel quicker than nominal yields with the 230bp level likely achievable in the near-term.

Tech: A faster descent for breakeven yields vs. nominal yields would mean higher real yields (+50-60bp range), which will keep a lid on expensive Tech multiples.  We see the potential for Tech multiple expansion when 10-year real yields fall below +9bp.

SPX: The S&P 500 (SPX) broke technical support at ~4070-4080 on Friday.  It’s late August when light attendance and light volume impairs the signal quality of markets, but strong secondary support sits near ~3920. Technical resistance remains in the 4320-4330 range.  Lower inflation expectations and cyclical sector leadership is the most likely recipe to get the SPX through 4330.