Morning Notes — Catalyst Ahead

The trigger for an SPX reversal in March 2020 was narrowing credit spreads. We accurately identified the trigger in early March with the event occurring 2 weeks later on 3/23/20.  Concerns about a Fed policy mistake are driving the current recession narrative, which is why we’re using the terminal Fed policy rate as our trigger for a sustained equity recovery.  Terminal Fed funds futures (June’ 23) peaked ~4 weeks ago at ~347bps and now sits just above 300bps. The terminal Fed funds rate has already rolled over but probably needs to trade closer to 280bps to trigger a sustained equity recovery.  Inflation expectations tend to lead Fed expectations by a few days and 10-year inflation breakeven yields below 257bps (now 277bps) would likely drive terminal rate expectations to the ~280bps level.