January 6, 2023
December non-farm payrolls came in slightly above expectations and the Unemployment Rate declined, but softer wage gains have dovish implications for markets. Increased risk of a policy mistake follows Wednesday’s release of December Fed Minutes that suggested the committee is looking at ‘financial conditions’ in addition to inflation and labor data. The Fed now seems intent on hiking rates until something breaks, which should keep equities under general pressure during Q1. From a technical perspective, the S&P 500 (SPX) maintains downside momentum at levels below 3930. We became tactically bearish when the SPX met our Q4’22 technical price objective at ~4100 with a break below 3900 increasing the likelihood for a retest of the lows near 3550. While the near-term macro backdrop remains challenging, it’s important to acknowledge that markets generally discount events 6-9 months in the future. A Fed pivot is the most logical bullish development for the macro backdrop. Lower bond yields and curve steepening should precede a Fed pivot by 1-3 months. We look for the index will bottom in the 3500s with increased conviction for a cyclical recovery when 10-year bond yields sustain levels below 3.40% and the curve twists steeper.