Morning Notes — Q4 Expectations

Deep oversold internal signals and momentum divergence (daily and weekly) from mid-October had Q4 expectations focused on a potential rally. The S&P 500 (SPX) has seen a +10% rally thus far with tactical support now at ~3900 as equities consolidate post-CPI gains. Terminal rate expectations in the OIS forward curve have been the dominant cross market for US equities since mid-April. There are three components to terminal rates including: 1) when the terminal rate is reached; 2) the terminal rate itself and; 3) implied rate cuts 2-years after the terminal rate is reached. Over the last month, equities have become most sensitive to implied rate cuts in the forward curve, but the best scenario for equities is to see the timing pulled forward, terminal rates lower and implied rate cuts higher. That’s exactly what happened in the wake of last week’s cooler than expected October CPI report. The next major inflation-related catalysts will be the November Jobs Report on 12/2 followed by November CPI on 12/13.

Fed officials continue to sound unimpressed by cooler than expected October inflation prints. Boston Fed President Collins said her view on rate hikes is unaffected by the latest inflation figures. However, aggregate Fed commentary this week implicitly blessed a slowdown in the pace of tightening. Some attention on the Fed being behind the curve as US economic data continues to deteriorate.

Our team noted short-term (3-6 month) U.S. Treasury Bills currently yield more than 4%. Clients who hold a tactical cash balance may want to consider Treasury Bills over lower interest bearing bank savings, money markets and CDs.  Interest earned on Treasury Bills is also exempt from state income tax.  Something to consider in the current environment. Please contact us for more info.