There has been a succession of central bank downshifts, adding to the “peak hawkishness” theme running through macro markets. And
investors are entirely focused on these  U-turns as peak rates get priced in. So, people don’t want to miss the stock market rally wagon, especially if the Fed conveys a similar policy downshift this week, sending the rally into overdrive as pivot procrastinators will be forced to chase.

Although I have a soft spot for equities, I look at the bond market to get a sense of reality.

The US 10yr yield has been steadily declining from its recent overshoot; however, yields showed some resilience on Frida closing back above the critical 4% level. Before I start punching my express  tickets to stop 4200 on the S&P 500, I would  like to see that 10 y yield retreat and hold steadily below 4%

While it is challenging to thread the needle of the “Fed pivoting” or “buyers returning to stocks,” last week was very constructive for risk despite mega-cap tech de-risking.

With the US economy still humming along and consumer balance sheets in a good place, seemingly buffeting main street from the current pace of rate hikes, when coupled with market-based forward inflation outlooks receding, it effectively brings equities to a point where macro risks are more balanced between recession vs. inflation, creating an increasingly high bar for the equity bears to stay in the game, even though interest rates could move a bit higher.


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While the pace of Fed hikes for the Dec and beyond meetings is debatable, importantly for risk markets, it is indisputable that the Fed is in the late stages of its hiking cycle, leaving underweight or short-positioned equity investors incredibly vulnerable to any significant retracement higher given how asymmetric price action would be on a return to the slowing inflation narrative.

Oil is opening steady as the impact of strong US export demand and a weaker US$ gets offset by China’s widened Covid curbs, which invariably raise concerns over demand from the world’s top crude importer. Indeed a case of post-Congress Party blues set in for the oil market with Covid zero seemingly entrenched in the political mandate. 

Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT