Morning Notes — New Phase

We may be entering a new phase as the disinflation narrative is now consensus and a still-hawkish Fed drives concerns for a hard landing. The evolution to a ‘bad news is bad’ environment is central to our outlook for a H1’23 retest of last year’s low and eventual bottom near that level. Unfortunately, a bottom in equity markets likely requires an end to the tightening cycle, and the Fed seems intent on hiking until something breaks. A hawkish Fed amid a deteriorating economic backdrop will provide a strong headwind for the SPX, but ongoing bearish sentiment and light equity positioning should cushion the impact. Our conviction for a successful retest is also predicated on a coincident steepening in the 5/10 yield curve that usually precedes a fed pivot by 1-3 months.  We’ve recently noted considerable narrowing in the 5/10 curve inversion, but near-term expectations for a positive spread seem premature. We see increased potential for a positively sloped 5/10 yield curve toward the end of Q1.