October 11, 2022
Terminal rate expectations remain the key to market sentiment as markets react to the latest NY Fed Survey of Consumer Expectations where 1-year inflation expectations dropped another 30bp to 5.4% to its lowest level in a year. Of course, household spending expectations also fell sharply with one of the largest single month declines since the report’s inception in June 2013. This is the first inflation-related report of the week with September PPI due tomorrow, CPI on Thursday and Michigan expectations on Friday.
Terminal rates: The market narrative remans focused on hawkish Fed messaging and the rising risk of recession, which makes terminal rate expectations the key cross market to watch for near-term direction. Terminal rate expectations are down ~3bp to 4.66% this morning with a coincident ~50bp plus tick in the S&P 500 (SPX). This relationship has been in effect since May/June with an estimated strong r-squared. Today’s move in terminal rate expectations follows less hawkish Fed rhetoric and lower 1-year inflation expectations from this morning’s NY Fed survey. Thursday’s CPI print is the focal point for investors as realized inflation data tends to move terminal rate expectations more than survey results.
More: Overnight US equity futures had the SPX opening at the upper end of strong technical support in the 3500s. Sustaining levels below ~3500 in the near term would likely require a strong CPI print (headline CPI north of +8.3% YoY), a spike in oil prices and disappointing early CQ3 earnings reports. Strong technical resistance remains in the 4150-4200 range, but the SPX would first need to cross above near-term resistance at ~3900. Getting through ~3900 would likely require a CPI report at/below +7.8% and a push to ~4200 requires help from a better than expected early CQ3 earnings/guidance. The first week of earnings season is dominated by Financials and Consumer Discretionary companies with good insight on consumption trends.