Morning Notes — Implied Rate Cuts

Implied rate cuts are something to watch alongside changes to Fed terminal rate expectations.

SPX: The S&P 500 should be able to squeeze higher after a brief consolidation phase.  Positioning dynamics looking very similar to what we saw in mid/late July and seasonal factors favor more upside into December.  Strong technical resistance sits in the 4100-4150 range (only implies +2.7% upside from current levels) and breaking through requires lower inflation data/lower terminal rate expectations. We don’t expect much relief from this week’s heavy schedule of Fed speakers. Tomorrow’s PPI report is the only realized inflation data for the week, but markets may also react to favorable inflation survey data (tomorrow and Thursday) given last week’s softer CPI print.

Better: Terminal rate expectations and the S&P 500 (SPX) have had a strong negative correlation since early May.  But recently, the SPX has become even more sensitive to expected Fed easing 24 months after terminal rates are reached.  The OIS forward curve shows Fed funds reaching terminal levels by May/June ’23 at 4.92%. Expectations in May/June 2025 now sit at 3.48%, which implies 145bp of rate cuts 2 years after terminal is reached.  Terminal rates may be 7bp higher today than they were just after last week’s softer CPI report, but the SPX is higher because implied rate cuts over the ensuing 24 months have risen 9bp to 145bp from 136bp.