November 3, 2022
Catalysts ahead, including tomorrow’s Jobs Report, will likely impact terminal rate expectations, bond yields and equity markets. Consensus is looking for non-farm payroll adds of +200,000 with a lower number preferred from a Fed/inflation perspective. Consensus is looking for the Unemployment Rate to tick up to 3.6% from 3.5% in September and an unchanged participation rate of 62.3%. Wages are also expected to remain unchanged at +0.3% MoM, which would take the YoY rate down to +4.7% from +5% in September.
Yesterday’s press conference may remind investors of October 2018 when Powell said the Fed will likely ‘hike interest rates beyond neutral.’ His comments as a frustrated, newly appointed Fed Chair sent bond yields materially higher with a spike in bond volatility taking the SPX down ~20% over 3 months. If you recall, the Fed then eased policy in January 2019 and the SPX rallied ~45% over the next 14 months. The current situation is much different than it was in 2018, but Powell seems frustrated again. In the summer of 2018, he was frustrated by a lack of market volatility and the potential for a wealth effect to drive higher realized inflation. Most of his frustration now seems to be directed at the overaccommodation that created higher realized inflation and the lagged impact of tightening.
Near-term technical support for the S&P 500 (SPX) sits at 3678. The most encouraging technical development recently has come from lower realized volatility with the VIX off mid-October highs of 33.6 to 25.4 today. Equity market volatility is being driven by lower bond market volatility as longer-dated yields are held in check by lower 10-year inflation breakeven yields. Static 10-year nominal yields and lower inflation expectations drive real yields to +170bp. Higher real yields will lead to incremental multiple compression in Tech as crowded longs (AMZN/GOOGL) unwind and make new lows. The Russell 2000 (RTY) and equal weight S&P 500 ETF (RSP) should outperform the S&P 500 (SPX) and NASDAQ 100 (NDX) until 10-year real yields fall below +138bp.