The S&P 500 has ventured below its 200-DMA (200-Day Moving Average) and is now edging closer to a significant technical support level at 4180. This shift in the index’s trajectory raises questions about the overall market sentiment and potential vulnerabilities.

Real Rates Influence Fed’s Next Moves

Recent expectations of an end to the Federal Reserve’s rate hikes appear to be unfounded. The latest inflation data leaves room for further rate increases. Presently, the market anticipates no change in the upcoming FOMC meeting on November 1, with moderately confident estimates of rate stability in subsequent meetings.

The 2-Year Treasury Yield and Peak Rates Scenario

The 2-year US Treasury yield has been trading within a range recently, hinting at bond market sentiment cautiously pricing a peak-rates scenario. This yield, at 5.05% as of October 23, still modestly remains below the current Fed Funds target range of 5.25%-5.50%, suggesting prevailing expectations that rate hikes may have peaked.

Fed’s Comfort with Monetary Tightness

The Federal Reserve appears to be more at ease with the current level of monetary tightness. Despite softer inflation, tighter policies, and higher real interest rates compared to January 2023, the Fed can maintain its policy rate while allowing passive tightening through higher real yields.

Risks to Peak Rate Forecast

While additional rate hikes cannot be entirely ruled out, the primary threats to the peak rate forecast include US economic resilience and persistent inflation. Presently, both of these risks seem moderate in persuading the Fed to implement further rate hikes, a sentiment reflected in the Treasury and Fed funds futures markets.

Volatility Near Psychological Levels

High volatility persists in US sovereign papers as investors grapple with decisions near crucial psychological levels. For instance, the US 10-year yield briefly exceeded the 5% psychological threshold before retreating sharply, triggered by notable short covering. The actions of bond bears Bill Ackman and Bill Gross, who covered their short bets on US Treasuries, significantly impacted these movements.

Rising US Debt and Yield Curve Considerations

The rising US debt, along with escalating US interest rates, remains a major concern. The total US debt has surged by over $600 billion since crossing the $33 trillion mark and by more than $2 trillion since the end of the debt ceiling crisis earlier this year. The yield curve is expected to stay high for an extended period, with the possibility of further upside in the US 10-year yield, potentially ending the inversion of the 2-10-year yield curve segment.

Impact of Big Tech on S&P 500

Five major tech companies in the S&P 500, including Amazon, Alphabet, Apple, Microsoft, and Nvidia, wield substantial influence in the major US indices. A significant downturn in the prices of these tech stocks could have far-reaching consequences, potentially driving the S&P 500 down by approximately 10% to 3900 or thereabouts.

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