Implied Rate Cuts
November 16, 2022
The S&P 500 has the potential to move higher than we initially expected given the post-CPI adjustment in terminal rate expectations and implied rate cuts 24 months out. Equity markets have recently become more sensitive to implied rate cuts than the terminal rate. Implied rate cuts 24 months forward have gone from 122bp last week to 148bp today, increasing the potential for the SPX to break above near-term technical resistance at ~4100. A sustained close north of ~4080 should be enough to carry the SPX to ~4250. We see levels below ~3900 as the downside signal, but currently see risk skewed to the upside. The NASDAQ 100 (NDX) is more sensitive to rates, inflation and the dollar than the SPX. We’d expect some NDX outperformance if the focus shifts to slowdown risks.
Yesterday’s PPI report confirmed last week’s cooler CPI print with increased expectations for a 50bp December rate hike and a ‘wait and see’ approach thereafter. The November Jobs Report on 12/2 will influence the outlook for monetary policy followed by CPI on 12/13 with the Fed meeting the next day. Markets only focus on one thing at a time with near-term potential for attention to shift to slowdown risks. Credit card master trusts reported their monthly data yesterday with MoM increases in charge-offs: 1) American Express +0.9% vs. 0.8% in September; 2) Bank America +1.37% vs. 1.3%; 3) Citi +1.32% vs. 1.12% last month; 4) Capital One +2.93% vs. 2.23%; 5) JPMorgan +1.19% vs. 1.15% in September. Meanwhile, a recent report from the New York Fed showed credit card balances rising +15% during Q3, the largest increase in >20 years.