Morning Notes — Narrative Change

Narrative Change: Equity market direction is often dominated by a single cross market, but those relationships tend to be fleeting. Terminal rates have been the dominant cross market for the S&P 500 (SPX) since mid-April, but we now see the potential for collinearity to fade in coming weeks.  Last week, the Fed’s revised median dot for 2023 increased by 50bp to 5.125%, but terminal rates have actually drifted lower over the last three sessions and so did the SPX. There’s also been a general correlation this year between a more hawkish Fed, lower equity markets and yield curve flattening. Wednesday’s more hawkish Fed meeting has generated equity downside, but the 2/10 yield curve has steepened since the meeting on increased demand for shorter-dated bonds. It has only been three days, but the combined dynamic suggests increased growth concerns and expectations for declining corporate earnings estimates.

SPX: The SPX faded from technical resistance at ~4,100 for a second time last Monday with Thursday’s break below 3900 opening the door for a retest of support near 3500. Catalyst vacuums tend to lead to trend continuation and the calendar into year-end doesn’t include any data/event that can shift the narrative.  The next major macro event will be the November Jobs Report due on 12/6. We’ll also be watching the unofficial earnings preannouncement season during the first two weeks of January.