August 26, 2022
Overreaction: Today’s downtick in equity markets is being attributed to a more hawkish than expected speech from Powell at Jackson Hole. While one can argue that point, the magnitude of the equity market reaction exceeds what we’re seeing in cross markets. Two-year Treasury yields are only up 5bp, terminal Fed expectations are only up 3bp and FX markets are mixed. If Powell’s comments were out of line with the present monetary narrative, those cross markets would be far more volatile.
Bond yields: The 10-year Treasury put/call ratio reached extreme overbought territory on 8/1 when yields approached 2.50%. The recent back up over 3% (3.03% today) should be viewed as mean reversion and we measure the top-end to ~3.15% before yields move lower in the fall/Q4.
Inflation expectations: Ten-year inflation breakeven yields have been dragged along with nominal yields, but are running into strong technical resistance at ~260bps. From here, we expect 10-year breakeven yields to pull back to ~240bp with stronger secondary support at ~230bp.
SPX: Near-term support for the S&P 500 falls in the 4070-4080 range with strong technical resistance near 4330. Levels below ~4070 would likely find a footing in the 3900-3940 area that marked the breakout from June/July pattern resistance. Levels above 4330 would likely result in considerable upside momentum given light positioning and bearish sentiment.