Morning Notes — Real Yields

NDX: Recent events in Ukraine are more dramatic than what we initially assumed.  The impact to financial markets comes through higher commodity prices, also reflected in today’s 8bps backup in 10-year inflation breakeven yields. The higher commodity prices are also putting downward pressure on nominal yields based on their presumed impact on consumption.  The combination is lower real yields (nominal yields-inflation expectations).  Recall the performance of Tech has a strong negative correlation with real yields.  Lower real yields as a result of an increased Ukraine/Russia conflict should take some near-term pressure off Tech multiples. Ten-year real yields have moved from a cycle high of -0.42 on February 10 to -0.78 today, with the trigger for incremental Tech multiple expansion at levels below -0.90. Recall the trigger we used for Tech multiple compression during Q4’21 was levels above -0.89. That level was crossed on January 4, 2022 leading to a peak to trough decline of -18.04% in the NASDAQ 100. The NDX has recovered +1.86% since real yields began to fall on 2/23.

SPX: The S&P 500 (SPX) reversal from our ~4,100 ‘shallow break’ target triggered a number of momentum divergence signals followed by systematic strategies.  These momentum divergence signals combined with extreme bearish equity sentiment (at all time records) has the potential to drive the SPX higher and longer than some expect.  We continue to view the January correction as price discovery into a Fed tightening cycle with the ~4,100-4,300 zone defining the low end of longer-term bullish range.  Equity market volatility remains a near-term technical challenge with VIX levels above 20 (now 30.8) providing a headwind to extended rallies. Notwithstanding geopolitical influences, we had been expecting volatility to remain elevated into the February CPI report (3/10) and FOMC meeting (3/16).