Cliff Risk

The S&P has traded lower each of the last four weeks and is now back down to trading where we were back in February. However, the last trade on Friday is lower than any closing price since May of 2021 so the markets look to be setting up a tester into a week with a slew of earnings and another rate decision by the Fed. It also does not help that the Q1 GDP printed at -1.4% after being up +6.9% for Q4. Expectations were at +1% so this was a surprise to the market and not something the Fed wanted to see before being forced to embark on a hawkish policy due to ultra-high inflationary numbers.

Weekly Chart of the S&P 500

Note: Each candlestick in the chart below represents 1-week.

Right down to a previous support area in this week’s chart and the momentum to the downside picked up into the closing hours which is not a good sign for the open on Monday. This chart has yet to register an oversold reading on the RSI (Relative Strength Index) where we see bottoms begin to form so another push lower may be needed to wash out all the sellers. That implies a potential drop down to the 38.2% FIB around $380 (7% lower).

S&P 500 ETF

If the $380 level does not hold then a potential move to the bottom of this chart is possible as broken uptrends (white lines) can only last so long before they flip to downtrends. If this is only a modest pullback on a multi-year timeframe then we should see a bottoming process around the $380 level.

The Yield Curve

The rubber will hit the road this week and everyone knows the Fed will go 50bps at this meeting. However, we don’t know how they will attempt to reduce the size of their balance sheet which is comprised of Treasuries and mortgage backed securities. Most of the Treasury holdings are short-term so that part of the portfolio can be held to maturity and not re-invested. However, fixed-rate mortgage portfolios perform poorly in a rising interest-rate environment as their maturities extend so there will be capital losses on these holdings if they are liquidated into the secondary market. This has the potential to cool off the real estate markets as mortgage rates could rise faster than Treasury yields.

Yield Curve by Kisco Capital

All this means is that the Fed has painted themselves into a corner as there are no good options when you are forced to withdraw liquidity from the system as the economy begins to show a limp. The stock markets are testing their resolve as they try to implement a hawkish policy so it is possible they blink but the inflation numbers are just too high to position for that scenario.

Chart of the Week!

As the following chart shows, Musk’s acquisition of Twitter, worth approximately $44 billion, is one of the largest leveraged buyouts in history. According to Twitter’s announcement of the deal, Musk has secured $25.5 billion in loans, backed in part by his own assets and in part by Twitter’s assets, to finance the deal.


Economic & Central Banking Snippets 

  • The Q1 Employment Cost Index which measures wage growth rose 1.4% verses Q4. Private sector wages grew 5% compared to last year which is the fastest since 2001.
Changes in Prices for Consumption
  • The headline Personal Consumption Expenditures (PCE) rose 6.6% and 5.2% core. Goods prices jumped 10.6% annually while services were higher by 4.5%. Energy prices jumped 34% and food prices by 9.2% compared to 2021.
  • Pending and New home Sales fell in March as the 30 yr mortgage rate averaged 4.80% in March, 4.15% in February, 3.78% in January and 3.33% in December. This is the fifth month of declines so the housing market is showing signs of cooling down. According to the NAR, “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity. The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor.”
  • Core Durable Goods orders in March rose 1% this month which was double the estimate. Versus February, orders rose for all main categories ex non-defense aircraft.
Contributions to GDP
  • GDP for the US economy in Q1 contracted by 1.4% after printing +6.9% for Q4 (+1% was expected). Trade was the main drag while consumer and capital spending partially offset this negative.

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

Paul McCarthy, President of Kisco Capital, LLC


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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