Bear Steepening Set to Resume if Fed Holds the Line on Rate Cuts
2025.01.29 02:38
Stocks finished the day higher, with the scheduled for today. The gained around 90%. Technology names bounced back yesterday, while the (RSP) moved lower by about 50, giving back the day before yesterday’s gains.
The RSP remains around resistance at the 61.8% retracement level, which would continue to suggest that the recent rally in the equal-weight sector appears to be a rebound until the ETF breaks out and moves higher.
Bear Steepening to Resume?
Today’s Fed meeting will significantly affect where rates go and whether the yield curve steepens. If the signals that it will not be cutting interest rates further, at least over the near term, I would think that we would likely see the yield curve steepen further. It is possible to say that the has formed a flag pattern and that the next big move will be for it to rise further in the form of a bear steepener.
Of course, much of what happens following today’s Fed meeting has much more to do with implied volatility levels than that of the decision itself. The 1-Day trades around 13, a reasonably low level 1 day ahead of the Fed. Unless it rises sharply today in the lead-up to that meeting, the S&P 500 will likely have a muted move post-FOMC and is vulnerable to move lower should Powell come across as more hawkish. Given IV is so low, should the Fed surprise the market and come across as more hawkish, implied volatility could spike.
Additionally, we saw the VIX also move lower yesterday, allowing the implied correlation to drop. Again, the 1-month implied correlation index is at a low value of just 8, and there is the risk that once we get past earnings later this week, this index could start to rise as implied volatility resets. Historically, low reading in the implied correlation can be associated with short-term market tops.
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