Fed Funds Rate

The Hawks are Circling

The entirety of this week hinged on a speech given by Fed Chair Jerome Powell on Friday that sparked a sell-off in the stock markets. The speech was given at an annual conference in Jackson Hole that was concise and to the point regarding inflation and policy. Here is one excerpt that stood out:

“History shows that the employment costs of bringing down inflation are likely to increase with delay. Our aim is to avoid that outcome by acting with resolve now.”

It seems that the purpose of the speech was to stomp out any talk of the Fed lightening up on their tightening policies. Over the summer, many pundits declared the Fed would pivot to a less aggressive stance as “peak inflation” became the foundation from a rebound in equities that began in June. Powell’s comments also mean the focus on labor and not inflation last year was a mistake and that interest rate hikes began way too late. Also, the semantics around “data dependence” or a “target inflation rate” are now tossed out the window as Powell has become direct with the markets as “Fair Warning” this week before the September meeting. Let’s also keep in mind that the balance sheet will be shrinking by $95B monthly and that is a drain on liquidity which is the life-blood of capital markets.

The Stock Market

The stock market looks to have completed a counter-trend move from the June low on Friday. There needs to be some more downside action before it is confirmed but we got a good start as the major indices fell 3-4% in Friday’s session. The momentum indicators at the bottom of this timeframe are rolling over so momentum is building up to the downside.

SPY Daily Chart

This brings the June low back into the spotlight as Powell has drawn a line to fight inflation with resolve.

In the longer-term chart below, I have included Fibonacci support levels from the 2008 low as an exercise if this is the beginning of a larger downtrend. As you can see, the S&P went sharply higher after the pandemic as governments and central banks across the globe dumped stimulus into the system. In any stock chart, these types of moves never last and always reverse at some point so keep that in mind while considering the potential paths in the coming months.


Coincidentally, the most common support levels (38.2% & 61.8%) frame out the top and bottom of pre and post pandemic price levels in the S&P. I would expect these levels to act as strong support if tested in the coming months.

The Bond Market

Fed Funds Target

Despite the carnage in stocks, bond prices didn’t move much on Friday. The chart on the right shows the historical levels of the Fed Funds rate and the bond market knows which direction the Fed will move to keep real rates from being deeply negative.

In the chart below, I have plotted the path of each tenor on the yield curve for the month of August. As you can see, tenors 2Yr and higher have all moved higher as we approach September so the bond market has been pricing in the Fed’s tightening policy. The question still remains as to what the shape the curve will take in the coming months. The recent moves this month show a steepening but that could change with more aggressive policy on the Fed Funds rate. In either case, credit spreads should widen to compensate investors for rate uncertainty and higher rates of inflation.

Yield Curve by Tenor

Economic Snippets

Personal Consumption Expenditures
  • Consumer spending rose 0.1% in July from June according to the Commerce Department. Americans spent less on gasoline last month, a reflection of lower prices at the pump. They slowed their outlays for services, and continued to spend money on long-lasting goods such as cars. (WSJ)
  • One anomaly in the GDP report that caught economists’ attention: The gap between gross domestic product and gross domestic income is the widest in records going back to 1947. GDP measures the value of goods and services produced in the U.S., GDI measures incomes earned and costs incurred in that production. They’re two different ways of calculating economic activity and should be about equal. Instead, one shows the economy growing, the other shrinking. That suggests that the Commerce Department is having a hard time measuring the economy right now, and some pretty significant revisions could be forthcoming. (WSJ)
  • There is no end in sight for Europe’s surge in energy prices. That could be just what the continent needs to avoid the devastating effects of having to ration natural gas this winter. This is because prices are so high—many times their level from last year—that they are forcing Europeans to save fuel and secure alternative supplies. (WSJ)
European Wholesale Gas Prices
  • U.S. new-home sales fell to the slowest pace in more than six years in July, the latest indication that a steep rise in prices and higher mortgage rates are hobbling the housing market. Single-family home sales dropped to an annual rate of 511,000 in July, the Commerce Department said Tuesday, the lowest level since January 2016. (WSJ)
New Single-Family Home Sales
Paul McCarthy of Kisco Capital, LLC

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Paul J. McCarthy III

President, Kisco Capital

Paul McCarthy

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