Inside Markets

The S&P 500 (SPX) has extended to the upper end of technical pattern resistance near 4200 with thin leadership in mega cap Tech and Comm Services.

Ongoing optimism around US debt ceiling negotiations remain the primary driver behind the recent backup in bond yields and relative strength in the dollar.

Coming out of yesterday's meeting both Biden and McConnell vowed that the US will not default.

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We continue to think that a full Fed pivot is required in order to drive the S&P 500 (SPX) through ~4200. Unfortunately, getting the Fed to pivot likely requires the onset of recession or major crisis in financial markets.

Friday's stronger than expected payroll gain, lower unemployment rate, and higher wages are taking bond yields higher in the near-term.

The debt ceiling issue is different than budget debates that sometimes cause a government shutdown.

This morning, the 5/10-year yield curve flipped into positive territory for the first time in 9 months.  A positively sloped 5/10 yield curve is our early signal of an imminent Fed pivot and catalyst to add equity exposure.  Unfortunately, intraday levels don’t count and the curve now needs to sustain and confirm a positive slope by moving above +9bp.  

History shows that monetary tightening works with a lag and sustained equity rallies require the Fed to first end its hiking cycle.

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The probability for a technical US debt default remains below 10%, but the likelihood for a credit rating downgrade may be fairly high.

Bullish developments begin to show with improvements in Q1 earnings.