Everything is bent right now. The supply chain is still clogged and the few companies that reported this week are predicting the supply chain will be challenging through 2023. Earnings reports will begin en masse after the July 4th holiday but the early color from CEOs is that economic activity dropped off towards the end of June.

The Bond Market

U.S. yields have been falling in a flight to better quality as the European Central Bank will begin raising rates in the coming weeks. The Fed also meets on July 27th where they will raise another 75bps and you can see the yield curve is kinked on both ends which probably won’t last much longer. The next rate move has the potential to invert the curve as that puts the Fed Funds rate at 2.5%. Combine that with an overseas bid and a recession being priced into the market the yield curve could have a proper inversion this summer.

U.S. Yield Curve

The S&P 500

The S&P 500 had its worst 1st-half since 1970 and we have yet to see a waterfall decline typical in a bear market. Will that happen next? Another good indicator of uncertainty is the U.S. Dollar which is at levels not seen since 2002 – the dollar is regarded as a flight to quality asset. If the dollar weakens due to overseas central banks raising rates, that would be good for precious metals and bad for U.S. stocks so that may be the next chapter for 2022.

In the chart below, we can see the S&P has yet to show signs of breaking the downtrend. Oversold levels on this weekly chart have been achieved but the MACD momentum indicator will continue to point lower until there is a sustained rebound in price.

Chart of the S&P 500

There was a nice rebound on Friday but there is a lot of news swirling around with overseas central banks, currency volatility and widening credit spreads. Earnings reports in July will be very important to watch as CEOs are giving good color on economic activity and the progress of the supply chain (not good, so far). Also, agricultural concerns are building as farmers warn that wheat crops harvested at the end of the summer will not be enough to fill global demand. There will be a lot to digest in the upcoming month so stay tuned!

Chart of the Week!

As a result of the Russian invasion of Ukraine on February 24, the prices of many of the commodities in question have risen sharply. This is particularly the case for coal and wheat, whose prices increased between 60 percent and 70 percent on average.


Economic & Central Banking Snippets 

Changes in Consumer Spending
  • The Bureau of Economic Analysis reported personal incomes rose 0.5% and spending edged up 0.2% in May. The Personal Consumption Expenditures Price Index, the Fed’s favorite measure of inflation, rose 6.3% compared to last year (core +4.7%). The March rise was the fastest since January 1982. 
  • OPEC members say the cartel and its allies have fallen far behind on their oil-production targets. The cartel is 3mm short of its daily target production of 42mm. The shortfall was due mainly to falling production in sanctions-hit Russia and chronic output problems in Nigeria, Angola and some other countries. There is also little spare capacity right now so there is no relief in sight.
  • Economic activity in China expanded in June after three straight months of contraction, according to official surveys of businesses and factories that point to a modest recovery after Covid-19 restrictions were eased in the world’s second-largest economy. 
  • The S&P CoreLogic Home Price Index for April rose 20.4% compared to last year. Tampa, Miami, Phoenix and Dallas led with 30%+ increases while Minneapolis, DC, Chicago and NY saw the slowest rates of increases in the low to mid teens.
Consumer Spending
  • U.S. household spending slowed in May as Americans faced historically high inflation, raising the prospect that the economy has contracted for a second straight quarter this year. Consumer spending cooled to a 0.2% advance in May, the Commerce Department said Thursday. (WSJ)
  • The June ISM manufacturing Index fell to 53 from 56.1 which was the weakest since June 2020 (over 50 is expansion and below 50 is contraction). In the report, new orders fell below 50 to 49.2 from 55.1 in May. Employment also fell below 50 to 47.3 from 49.6 in May.
  • Consumers’ short-term outlook for the U.S. economy dropped to its lowest point in nearly a decade on concerns about inflation. The Conference Board’s consumer-confidence index, which hints at American attitudes toward jobs and the economy, dropped to 98.7 in June from 103.2 in May. (WSJ)
Consumer Confidence

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

Paul J. McCarthy III


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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