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Morning Notes — Catalyst Ahead

Catalyst Ahead

June 8, 2022

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.

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