Terminal Rate Expectations
September 28, 2022
Terminal rate expectations are in focus as lower bond yields follow the BOE’s announced bond purchase program that erases about half the yield backup since Friday’s controversial stimulus rollout. The temporary bond purchase plan will help ease FX and bond market dislocation, but doesn’t address the main cause. The IMF, Moody’s and the White House criticized the UK’s new fiscal plan overnight, although the White House has also been guilty of pushing for increased fiscal spending just last month.
While nothing incremental comes from Fed officials, with Powell avoiding policy-related topics at a speech this morning, terminal rate expectations continue to be key.
Cross market: Terminal rate expectations are down –10.2bp to ~4.42% this morning. This is below last week’s peak at ~4.67% and below the 4.50% level suggested by the recent updated Fed dot plot. Terminal rate expectations have been the dominant cross market for equities since late Q1. The S&P 500 should be able to stabilize as long as terminal rates stay anchored below 4.50%.
SPX: The S&P 500 has been in deep oversold territory for the last two sessions, leaving the door open for a reflex rally in the 10-15% range. It doesn’t take much to start a reflex rally when markets become this oversold. At this point, we’re looking for the technical momentum divergence that often precedes a recovery from deeply oversold levels. We saw two days of momentum divergence preceding the June 21 rebound and eventual +17.5% rally through mid-August. If that doesn’t materialize, we’d look to add exposure on a capitulation-like decline in the 3500s, which is ~5% lower than current levels. A more sustained and powerful recovery likely requires a meaningful deceleration in core inflation. The next catalyst comes on 10/13 with the release of September CPI.