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Morning Notes — Key Cross Markets

Key Cross Markets

June 2, 2022

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.

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