Morning Notes — Priced for Dovish Data

The S&P 500 (SPX) is priced for dovish data next week, after managing to close above its 200-day moving average on Friday and generating press optimism that we could see more CTA buying activity this morning.  When we and others reference technical levels, the reference is usually to ‘sustained’ closing levels, and the index has been unable to sustain those levels this morning.  Levels just above 4100 include several technical hurdles including the 200-day Moving Average, Volume Weighted Average Price (VWAP) for SPY and the downward sloping trend channel that has contained the bear market since the start of the year. These three levels were higher back in mid-October when we estimated the ~4200 level would likely cap a Q4 rally. Next week includes two catalysts (November CPI and Fed meeting) that have the potential to challenge these technical hurdles.  Another 50bp MoM deceleration in headline CPI and less hawkish Fed outcome could take terminal rates lower and stocks higher.  However, a good amount of dovishness is already priced into terminal rates with expected rate cuts 24 months after terminal (June ’25) expanding from ~140bp early last week to ~180bp today. Net-net, we expect the 4100-4200 range will cap the Q4 rally with a sustained break below 3910 signaling downside to a Q1’23 retest in the 3500s.  

Fundamental: The Q4 rally has followed the unwinding of a crowded macro trade. Investors covered long duration Treasury shorts, sold US dollar long positions and covered equity short positions after macro data signaled an early disinflationary trend.  That trade is no longer crowded and with 180bp of rate cuts already priced into the 2-year forward curve, our concern is that a higher ’23 median dot could quickly push 10-year Treasury yields back above 4%.