Morning Notes — Key Cross Markets

The relationship between inflation breakeven yields and terminal Fed rate expectations is the most important cross market indicator for equity investors given concerns for a Fed policy mistake. It’s encouraging to see the current equity recovery with well-anchored 10-year inflation expectations and lower terminal Fed expectations. Ten-year inflation breakeven yields have descended from a peak of ~310bps to ~268ps today, while terminal Fed rate expectations have declined from a peak of ~3.47% to ~2.94%.  This all fits with the peak inflation narrative and sets the stage for a potential soft landing.  The S&P 500 faces technical resistance just above 4,300 with a greater potential to break through when terminal Fed rate expectations (June ’23 Fed funds futures) break support below ~2.80%.  We see that happening once 10-year inflation breakeven yields move below ~250bps.