Go Back to Work

The pandemic assistance has run out and we are finally seeing data that people are getting back to work as the payroll number on Friday was much better than expected. The high jobs numbers are typical of a period after a recession so this is an encouraging sign for 2022. It is also common to see central banks raise interest rates in a recovery and global bond markets are reflecting this as the dollar amount of negative yielding bonds has fallen to $6.1 Trillion, the lowest since October 2018 and about 2/3 the level of its December 2020 peak. Of course, inflation is a big concern but raising interest rates is long overdue for most central banks as QE programs have been in place for over a decade.

The Yield Curve

The yield curve steepened this week as interest rates rose in reaction to a recovery in equities and central banks instituting hawkish policies. There is a good bit of concern over inflation and interest rates and we will get another CPI read on Thursday morning to evaluate this trend. If the rate of change in the CPI shows signs of abating then yields on the long-end will likely fall and flatten the curve. One encouraging sign regarding inflation is that the auto companies are reconciling their supply chain issues which have contributed greatly to the inflationary pressures in the economy. And as the labor market heals so will the supply chain as worker shortages have curtailed productivity and caused shortages of goods which forces prices higher. If there is a return to normalcy in the supply chain then the pressure will be off the Fed to aggressively raise rates to combat inflation. As it stands, the yield curve is messaging a 25bps hike at the March meeting and one more within six months.

U.S. Yield Curve

The S&P 500

The S&P continues to recover from the January 24th low and did break resistance at 4450 this week only to re-test that level on Friday. If this level holds next week and the S&P moves above 4600 then the January low is likely in the rear-view mirror.

S&P 500 Futures

Growth & Large-Cap Stocks

The concern over rising interest rates and a hawkish Fed caused many growth stocks to peak in in Q2 of last year. If we look at the Russell 2000, which is considered the index for growth stocks, we can see sideways trading since last March with a top in November and a pullback to the 38.2% FIB at $188 in January. The RSI reading shows a condition of being almost as oversold as the pandemic low so perhaps the January 24th low will create a confluence with the S&P and NASDAQ that will get the major indices trending to the upside in unison.

Russell 2000

Below Facebook experienced a 26% drop after their earnings announcement which is an astounding drop for such a large company. However, the stock peaked last August and had already been in a multi-month correction after advancing 180% from the pandemic low in 2020. The stock tapped the 61.8% Fibonacci retracement on Friday and is now more oversold then the pandemic low. So, there is a case that this pullback is near an end but it will take sometime for this one to re-build an uptrend.

Facebook Stock

Amazon earnings were well received this week with a strong rebound in the stock price. Like Facebook, Amazon last topped in July and then failed in November to make a new high which caused the stock to drop to a 2-year low. On the RSI below, Amazon had not been this oversold since the low of 2008 (not seen in this chart). So, the impulsive move higher this week is a good sign that the pullback from its last high is over.

Amazon Stock

Many smaller cap growth stocks have similar charts to Facebook and Amazon and may be showing early signs of bottoming. There has been a great deal of sector rotation this past year so a large correction for many stocks were already underway before the January swoon. Unless a larger decline and a bear market are in the early stages, we should see signs of a turnaround to the upside as the labor market and supply chains heal. We should have answer in February on this question.

Chart of the Week!

Cryptocurrency usage continues to increase across the globe. Among developed countries, cryptocurrency use was most widespread in English-speaking countries – first and foremost the United States, but also the UK, Canada, South Africa and Australia. In the case of Russia’s and Ukraine’s intensive use, Chainalysis ties usage to widespread mistrust of institutions and possibly capital flight and tax avoidance.

Individuals in developing countries also use crypto in peer-to-peer payments. In this segment, African countries like Nigeria and Kenya rank high. African countries have been on the forefront of adopting innovative P2P payment methods, for example mobile payments, in the process of leapfrogging options like bank transfers and those digital payment options tied to them.

Cryptocurrency usage.

Economic & Central Banking Snippets 

Labor Force Participation Rate
  • The U.S. economy added 467,000 jobs in January, the Labor Department said Friday. Revisions to the November and December numbers added around 700,000 more to payrolls than previously reported. These are very strong numbers for job growth and are normally seen when a recession is ending.
  • The labor force also expanded by 1.39mm which led to a one tenth rise in the unemployment rate reported at 4%.
  • The labor force participation rate also rose to 62.2% – the highest since the start of the pandemic.
  • Average hourly earnings rose 5.7% compared to last year.
  • Vehicle sales in January totaled 15mm which was above estimates of 13mm but still below where it was one year ago at 16.6mm. There are signs that the semiconductor shortage is abating so these numbers should improve in the coming months.
  • Job openings as of December remained unusually high at 10.93mm – plenty of jobs to go around.
  • The Bank of England raised rates by 25 bps to .50% and 4 of the 9 members voted for a 50 bps increase.
  • The European Central Bank (ECB) acknowledged that their transitory patience can no longer be defended and that interest rate increases will happen this year after their QE fully ends.
  • The Federal Reserve added another $13B to their balance sheet taking it to a fresh record high of $8,873,211,000,000.
  • U.S. factory activity cooled in January as manufacturers struggled through material shortages, transportation bottlenecks and workers quitting or calling in sick as Covid-19 cases surged across the country. The Institute for Supply Management’s monthly index fell to 57.6 from 58.8 in December. New orders, at 57.9, were the weakest since June 2020. Still, any mark above 50 indicates an expansion in activity and there were signs that some supply constraints are easing. (WSJ)

Macro Snippets

Bungie Logo
  • Sony will buy Bungie, the video game maker behind “Halo” and the Destiny franchises, in a $3.6 billion deal. The deal follows Microsoft’s $69 billion plans to buy game maker Activision Blizzard.
  • Home Depot said it would hire more than 100,000 workers as the retailer gears up for its spring selling season, when demand for home-improvement products is at its peak. The company has typically hired around 80,000 workers for spring over the past years.
  • Saudi Arabia has restarted plans to list more shares of Aramco, the world’s most valuable oil company, according to people familiar with the company’s strategy, with an ambition to sell as much as a $50 billion stake, which at current valuations would be 2.5% of the company. (WSJ)
  • Intuit said TurboTax has teamed up with Coinbase to allow users to deposit tax refunds into cryptocurrency accounts.
Paul McCarthy of Kisco Capital, LLC

That is all for now and thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.