Morning Notes — Retest

The S&P 500 (SPX) is testing last Thursday’s intraday reversal level in the 3,850-3,900 range with the 38.2% Fibonacci retracement level at ~3,840.  Risk/reward remains skewed to the upside with sentiment and positioning at bearish extremes.  In the near-term, the SPX remains vulnerable at levels below 4,100-4,150, but the narrative for recovery may be taking shape. Russia/Ukraine seem to be at a stalemate, inflation expectations are falling (10-year breakeven yields are down -9bps this morning), May inflation data is poised to decelerate and the Fed is using softer language. Any rally through 4,150 that includes lower inflation expectations (breakeven yields), lower nominal bond yields and lower Fed rate expectations (Fed fund futures) would open the door to new highs in the SPX.