Discussion
In one of the best ex ante pieces of analysis I’ve seen YTD, early last month Andy Constan of Damped Spring Advisors outlined the likely script for how the rest of this tightening cycle is likely to play out (see file below), with the next “act” being a bear steepening of the UST curve catalyzed by greater-than-expected UST bond issuance. That is exactly what is playing out right now, and until the Fed and/or Treasury step in with some form of a bond purchase program to steady the rise in rates1, I think the Fed is going to have a difficult time from here controlling asset price demolition via rhetoric around the Fed Funds path.
Exhibits
A sustained break of the 20dma, as other evidence suggests is likely, would open up SPX downside probably to around that 4400 50dma level.
HY CDX, breadth, and defensive sector price action all suggest more downside is in store. But to be fair, there’s always a chance for at least a mid-day bottom here post-European close, so it’s how everything trades into the close that will be key.
On this note, today the Strategas DC policy team floated the idea that Yellen would spend down the TGA in August. Something to watch in the coming days and weeks.