Morning Notes — Cross Market Indicator

Bonds and stocks have been positively correlated over the last 12 months, and today’s bifurcation may reflect growing concerns for a deeper economic slowdown in the months ahead. Our outlook for the S&P 500 to retest last year’s low during Q1 and make a bottom in the 3500s is predicated on a break in this cross-market relationship. If we’re right, we should see a period of weaker macro data driving greater concern for a hard landing and expectations for an eventual Fed pivot starting a new cyclical bull market.  Certain parts of the bond market already reflect an eventual Fed pivot with OIS forwards priced for more than 40bp of rate cuts later this year. We expect investors will begin to look beyond an economic slowdown to a policy shift once the 5/10 curve breaks into positive territory.  The 5/10 curve inversion reached a peak of -26bp in mid-October and has narrowed to just -4bp today. While this is an encouraging development, we remain concerned about a temporary re-widening of the 5/10 curve inversion based on hawkish near-term Fed rhetoric or choppy inflation data.