Technical Levels and a Fundamental Prerequisite
June 27, 2022
The 4200 level is a significant technical challenge and pushing beyond the range will likely require a change in macro fundamentals, specifically realized inflation. Inflation expectations have already turned lower with 10-year breakeven yields declining from key resistance of 283bp on June 10 to 258bp today. The cycle high was 303bp on 4/21 with the 5/9 break below 282bp restoring rational collinearity between Fed rate expectations and nominal bond yields. The collinearity between cross markets may be rational, but equities are still dealing with terminal Fed rate expectations near 3.50%, while cross markets suggest a neutral rate closer to 2.60%. Inflation expectations are signaling a peak, but the Fed wants to see a peak in realized inflation before it changes course. The fundamental bottom in markets will likely follow two consecutive misses in realized core inflation (PCE or CPI).