Morning Notes — Yield and SPX Targets Post-FOMC

Yesterday: Equities closed lower after a more hawkish dot plot (median ’23 dot of 4.625% pushed terminal rate expectations higher) and increased recession worries on Powell’s warning about economic pain. Ultimately, the Fed is looking for increased labor supply or seems willing to slow the economy in order to induce layoffs. Powell also mentioned the housing market will probably have to “go through a correction” to provide greater balance. While there are signs that a housing market correction may have already begun, there is little evidence yet of slack in labor markets.  Near record corporate profit margins and near-record corporate cash could make labor market slack more difficult to produce. Consumers also still have large amounts of cash with savings and checking balances ~30%-50% above December 2019 levels.

Bond yields: As a result of yesterday’s meeting and press conference, we expect 2-year Treasury yields to reach 4.45% and 10-year yields to reach 3.75%.

SPX: Yesterday’s meeting also increases the likelihood for the S&P 500 to make its way toward long-term technical and valuation support near 3500.   

Bright side: The coordinated global central bank tightening should lead to a faster (quarters not years) deceleration in inflation than would be the case if the US was acting alone. It’s also possible for inflation to decelerate more quickly in the event of a Russia/Ukraine solution and/or China reopening (further improvement in supply chain bottlenecks/lower freight rates).  While it’s natural to draw comparisons to the massive required rate hikes during the late-70’s/early-80’s tightening cycle, it’s important to consider that current debt/GDP is twice as large as it was during that period.  The increased debt/GDP means more debt is subject to higher interest rate resets, which will likely reduce the amount of tightening required to slow inflation.