Central banks are beginning to play catch-up. The Fed increased the Fed Funds Rate on Wednesday by 75bps to a range of 1.5% to 1.75%. The hike was more than they projected at their last meeting and they are guiding to a year-end rate of over 3%. None of this was a surprise but foreign central banks are now beginning to follow the Fed’s lead:
- The Brazilian central bank raised its Selic rate this week by 50bps to 13.25% which was at 4.25% one year ago.
- The Swiss National Bank had a surprise rate increase of 50bps before the Thursday open to -0.25%.
- The Bank of England also raised rates 0.25% to 1.25% on Thursday which was expected at a scheduled meeting.
- The central bank in Taiwan also increased interest rates by 0.125% to 1.50%. A 25 bps rate increase was expected but this central bank is more concerned about growth over inflation.
- The Bank of Japan didn’t join the Fed and confirmed they will not join other central banks in tightening monetary policy and kept its target for short-term interest rates at -0.1% and its target for the 10-year at 0%. However, this policy will weaken the Yen and is likely unsustainable which should cause some excitement as the rest of the world raises rates.
- The European Central Bank (ECB) just finished quantitative easing but hinted that a tightening policy is imminent – no details yet.
Interest Rates
In this market, stocks go down when interest rates go up and we are seeing rates rise in tandem across the global interest rate complex. This will be the trend for some time as high rates of inflation act as a margin call on central bank easing policy. Central banks have talked a big game of fighting inflation if it would ever appear for the last 10+ years and now there will be a test of their mettle. Do central banks have the guts to raise rates into a challenged economy?
The S&P 500
As inflation rises we will see more earnings warnings in July coming from tech and consumer discretionary stocks. With a rising cost of capital, companies will need to pivot to generating positive cash flow and driving earnings to the bottom line.
In the meantime we can see in this chart for long-term investors that the uptrend from the 2009 low may be over. In the chart, you can see that the corrections of 2015 and 2018 and even the pandemic low look paltry in comparison to the pullback experienced this year. This chart is a “monthly” chart which means each bar is one-month worth of price action and it is easy to see that the momentum is accelerating to the downside for June.
A typical support level for a pullback on any timeframe is typically between the 38.2% and the 61.8% Fibonacci retracements and you can see these levels line-up almost perfectly with the top and bottom of the pandemic high/low. It is a good bet that the S&P is headed into this price range in the coming months and a bottom is unlikely until we register an oversold condition on the Relative Strength Index on the bottom of this chart.
Chart of the Week!
Over the past twelve months, gas prices have surged by more than 60%, leaving millions of Americans who rely on their car with unprecedented pain at the pump.
Economic & Central Banking Snippets
- Producer Prices in May rose 10.8% compared to last year – think of this as inflation in the pipeline. Food prices are up by 13% and energy prices jumped 45% in the last twelve months.
- The Cass Freight Company said its shipments index was up 5.4% in May after being down 2.6% in April (on a month to month basis). The company said, “After a nearly two year cycle of surging freight volumes, two key drivers of growth for the freight cycle – goods consumption and inventory restocking – are faltering.”
- The June Philadelphia Manufacturing Index fell to -3.3, the first time below zero since May 2020.
- After sharp buying in the prior 5 months, foreigners halted their net purchases of US notes and bonds in April, selling a modest $1.1B.
- Natural gas prices in Europe jumped 46% this week in response to reduced supply from Russia and a delay in exports from the US Freeport LNG facility which suffered a fire.
- U.S. mortgage rates have hit their highest level in more than 13 years, the latest sign of market repercussions from the Fed’s efforts to bring inflation under control through higher borrowing costs. The average rate on a 30-year fixed-rate mortgage rose to 5.78%, according to mortgage-finance giant Freddie Mac, the highest level since November 2008 and well above the 3.11% recorded near the end of last year. Higher rates could make monthly mortgage payments more expensive, which could cool the hot housing market. (WSJ)
Macro Snippets
- With inflation showing little sign of cooling, many investors fear corporate earnings could be the market’s next support to fall.
- More than 60% of CEOs expect a recession within 12 to 18 months in the region where their company operates, and an additional 15% think their region is already in recession, according to a Conference Board survey of 750 CEOs and other C-suite executives conducted in May.
- U.S. cosmetics company Revlon files for bankruptcy. The 90-year-old company struggles to navigate a challenging environment under the debt load it amassed while trying to keep up with online-focused competitors.
- Kroger raised its profit expectations for the year, the latest retailer to defy the inflation-driven slump by focusing on essentials. SEE MY APPEARANCE ON THE TD AMERITRADE NETWORK REGARDING KROGER HERE.
- Tesla is raising the prices on some of its cars by as much as $6,000 to offset higher costs of labor, transportation and raw materials. (WSJ)
- The German government is bailing out the German subsidiary of Russian gas giant Gazprom PJSC to prevent its collapse. The German government took over the company in April to keep Russian natural gas flowing into Germany.
That is all for now and thank you for being a subscriber!
Regards,
President – Kisco Capital