Could PCE Data Today Fuel a Bear Steepening Cycle?
2024.12.20 03:38
The broke its 10-day losing streak yesterday; however, the bad news is it only finished the day up 0.04%. So, while the streak was broken, it was just barely. 
Meanwhile, the ended the day essentially flat. It was up about 70 to 80 basis points earlier in the day, but those gains evaporated as the day progressed.
The didn’t fare well either, closing about 50 basis points lower and, more importantly, breaking below support at 21,160—a significant level.
We’ll need to see how this plays out today with the report. The next support region for the Nasdaq might not come until around 20,740, roughly 400 points lower.
Yesterday was the day before OpEx. Typically, on the day before OpEx, the ETF buys back the covered call it sold on the the prior month. These flows generally start around 2 PM. Despite the market being higher earlier in the day, it fell apart toward the close, even with the QYLD ETF buying back its December 21st option at the 20,475 strike.
This should have been more bullish, given the delta notional value of nearly $10 billion. The fact that the market still finished down suggests significant selling pressure throughout the afternoon.
Yoday, the QYLD ETF will sell an option in the Nasdaq index for January’s OpEx, which may create downward pressure due to market makers’ hedging-related flow. This could weigh on the market, particularly in the morning when these actions occur.
Yesterday’s price action wasn’t encouraging, with the S&P 500 appearing to close near a key support level at 4,875, which could lead to a gap fill at 4,780 or even as low as 4,690.
What to Expect From PCE
The PCE report today will be critical. While the Fed has indicated its estimate of 0.2% core inflation aligns with analyst expectations, the average market estimate is closer to 0.17%. A result above 0.2% could surprise the market and further pressure rates, which rose again yesterday.
The climbed five basis points to 4.57%, and the rose six basis points to 4.74%. This steepened the yield curve, with the increasing ten basis points to 25, breaking out of a bull flag pattern.
This steepening phase could signal a bear steepening cycle where the 10-year yield rises away from the , a particularly adverse scenario for equities.
Yesterday’s five-year TIPS auction was notably weak, with a bid-to-cover ratio of 2.1, down from the previous 2.4, and an indirect participation rate of just 51.4%—the lowest since 2013. This pushed real yields higher, with the real yield up five basis points to 2.09% and the 10-year real yield up seven basis points to 2.26%.
Rising real yields, if they outpace nominal rates, can suppress breakeven inflation expectations, as observed yesterday with the two-year swap falling two basis points to 2.52%. While inflation expectations have stopped rising for now—a positive sign for the Fed—they remain elevated compared to September.
Market breadth remains a concern, with small caps underperforming. Yesterday, the fell another 44 basis points, aligning with widening credit spreads. The CDX High Yield Credit Spread Index rose five points to 318, suggesting small caps may struggle further as credit spreads widen. Historically, small caps correlate strongly with credit spreads rather than nominal or real rates.
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