Make or Break Time

A lot of news to digest this week as we had a hot CPI reading, a Fed Governor (James Bullard) voicing a desire to raise interest rates dramatically and the potential for an invasion in Ukraine. If we put all that aside and look at the chart below of the S&P 500, we can see that the stock market is at an inflection point. A key support level (not in this chart) was broken on Friday so this opens the possibility of pushing lower next week and perhaps re-testing the 4252 level at the bottom of this chart. The swings have been large in 2022 as the yield curve adjusts to elevated levels of inflation so this level of uncertainty may exist until the Fed makes the next policy statement (March 16th).

S&P 500

One bright spot is that earnings reports have been generally good as companies re-adjust their prices and the supply chain will begin to heal once the labor shortages abate in the coming months. However, inflation is climbing higher while trade normalizes and rising prices are beginning to pinch consumers and eventually their discretionary spending habits. There is one more CPI read before the Fed’s next meeting and I wouldn’t be surprised to see an intra-meeting rate hike before March if the stock market falls on inflation concerns.

The Bond Market

10Yr Treasury Yields

The yield curve is not so sleepy anymore and you can see to the right that yields on the 10Yr have been rising steadily since the March 2020 low. For 2022, the 10Yr has gone vertical as inflation accelerates which will force the Fed’s hand in reversing policy stimulus.

Below is another chart showing the shape of the yield curve which can tell us what the bond market thinks of growth in the coming years. As you can see, the curve is very steep up to 2Yrs which means the Fed will be raising interest rates very soon. However, the 3Yr-10Yr part of the is very flat and that sends a warning signal that slower growth may be brewing as there is only 20bps between these two tenors. When longer yields trade below shorter yields that is an “inverted” yield curve and when 10Yrs trade lower than 2Yrs that is a recession indicator (usually within 18 months). At the close on Friday, 30Yrs are inverted to 20Yrs by 6bps and the 7Yr traded below the 10Yr by 1bps so the shape of the curve is something to watch closely right now.

UST Treasury Curve

Chart of the Week!

Statista - State of Democracy

Economic & Central Banking Snippets 

  • U.S. inflation reached another four-decade high last month, accelerating to a 7.5% annual rate as strong consumer demand collided with pandemic-related supply disruptions. The Labor Department on Thursday said the consumer-price index in January reached its highest level since February 1982, when compared with the same month a year ago. (WSJ)
  • The preliminary February UoM consumer confidence index fell to 61.7 from 67.2 and that was much worse than the forecast of 67. You have to go back to October 2011 to see a print that was lower. (Boockvar)
  • The U.S. federal budget in January ran a monthly surplus for the first time since September 2019, as the government took in more in tax and other revenue and spent less on Covid-19 pandemic aid programs. The surplus last month reached $119 billion, the Treasury Department reported Thursday. (WSJ)
US Federal Budget

Macro Snippets

Retirees as part of the population
  • Of the roughly 4.2 million people who left the workforce during the pandemic, more than one in three did so partly because of rising portfolio and home values. This helped push the percentage of retirees in the U.S. population to 19.4% as of October 2021, up from 18.3% in early 2020. (WSJ)
  • Super Bowl LVI is poised to be the most bet upon game in football history, as the legalization of sports betting grows. A record 31.4 million Americans plan to bet on Sunday’s Super Bowl, a 35% increase from last year’s game. The Supreme Court opened the door for legalized sports betting beyond Nevada in 2018, and now 33 states and the District of Columbia have approved it. Three of those states haven’t allowed betting to begin yet. (WSJ)
  • The White House announced $5 billion in funding for states to install electric vehicle chargers. The nationwide charging network will give priority to interstate highways and fast chargers. (Investopedia)
  • Nvidia and SoftBank called off their blockbuster Arm deal. Japan’s SoftBank said it now plans to take the U.K.-based chip-design specialist public instead of selling it to Nvidia, after the proposed transaction raised antitrust concerns. (Investopedia)
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.