Morning Notes — SVX Advances from Key Support

The global cyclical recovery and reflation theme will likely be the dominant market narrative if the Omicron variant turns out to be a non-factor and China’s credit impulse improves as some expect.  Hawkish Fed commentary into next week’s meeting has bond markets pricing for a potential Fed policy mistake seen in the recent flattening of the Treasury yield curve.  However, the cyclically-sensitive indices like the S&P 500 Value Index (SVX), Russell 2000 (RTY) and Euro Stoxx 50 (SX5E) held technical support last week and now reversing from oversold levels.  The resiliency of these indices is likely due to the relatively high probability for inflation to decelerate in Q1 as supply bottleneck pressures ease and base effects kick in. Lower rates of inflation would shift the Fed focus to policy normalization in a sustained cyclical recovery, yield curve steepening and a resumption in cyclical/value equity leadership.