Morning Notes — Consolidation Mode and Sector Preference

Bond yields: Most of the downside in yields is currently being driven by illiquid conditions during a seasonally slow period for Treasury issuance.  Ten-year Treasury prices are extremely overbought (yields at 2.61%) and the put/call ratio is now more than 2 standard deviations above the mean.

SPX: The S&P 500 (SPX) will likely spend time consolidating recent gains into this Friday’s Jobs Report and next Wednesday’s CPI print.  In our view, sustaining levels north of ~4200 resistance requires lower realized inflation and a Fed pivot.  Terminal Fed expectations remain at ~3.25% and need to drift closer to the ~2.50% neutral rate before equities sustainably advance.  We could see a move above ~4200 if terminal Fed expectations break below 3%. Near-term SPX support sits at ~4070 with stronger secondary support in the 3910-3944 range.

Sectors: At the moment, 10-year real yields are trading at +11bp with lower levels driving growth sector outperformance, particularly Tech. Ten-year real yields and Tech sector performance have a strong negative correlation. Real yields are derived by subtracting inflation expectations from nominal yields. Lower nominal yields allow all multiples to expand, but lower real yields drive more rapid Tech multiple expansion.  The recent relative outperformance in the Tech sector followed 10-year real yields breaking to new short-term lows below +52bp and accelerated on a break below the 50-day moving average at +43bp.  Levels below the 100-day moving average of +11bp should lead to further acceleration and a break below -12bp (April low) would make it obvious to everyone.