Inflation numbers reported this week came in very high as consumer prices rose 9.1% and producer prices are up 11.3% compared to last year. Inflation remains persistent and central banks are beginning to get more aggressive as the Bank of Canada raised 1% this week and the bond market is trading like the Fed will go the same on the 27th. The reversal of these inflationary pressures will be monumental as spiking prices will begin to reduce demand as consumers find their discretionary income evaporating.
The Bond Market
The yield curve has been inverting over the last month as expectations on the path of interest rates are shifting as the Fed will need to pivot to a more aggressive policy. In response, the shape of the yield curve is inverting which warns Fed policy will curb growth even further in the coming months.
Central bankers across the globe will no longer have the flexibility to tip-toe around the stock market and we have yet to see a notable reduction in balance sheet holdings which runs in the many trillions. The collision of inflation and growth will continue unless central banks get religion on their loose policies. There is a lot more tightening to come and we will likely get a revision in policy outlook at their next meeting on the 27th.
The S&P 500
The S&P 500 was volatile this week but ended up unchanged as we got an options expiration rally on a summer Friday. So, there is not much difference in the chart this week but as you can see, a major peak was achieved at the end of last year and there has been no sign of a trend change.
However, the wedging price action (white lines) could portend a counter-trend move to the upside if prices can push through $393.50 and break the white trend-line on the right (resistance on the upside will be heavy in the $407-$435 zone). The S&P has been rangebound for the last two weeks and the market may be patiently waiting for Q2 corporate earnings and the Fed meeting on the 27th. If we break the bottom of the chart at $362 then a drop to the $325 area will be on the table.
That is all for now and thank you for being a subscriber!
President – Kisco Capital