Breakout or Rollover?

Another inflation read this week as producer prices (more below) show signs of cooling off as we are approach the next Fed policy statement on February 1st. Expectations are now for an increase of 25bps and maybe not much more after that according to a few Fed Governors in recent interviews. We also know that China will re-open soon which will help alleviate supply chain shortages after three years in COVID lockdowns. However, China buys lots of commodities like oil and that may cause inflation pressures to rise later this year.

The Stock Market

A window may be forming where the Fed signals market friendly news (less rate hikes) and prior to China re-inflating the energy market where stocks get a sustained rally. However, the technicals have been treacherous over the past year and the green trend-line in the chart below has been a notable barrier. The S&P did attempt to break this boundary on Tuesday only to be rejected on Wednesday and then make a comeback on Friday.

Chart of the S&P 500 by @kiscocap.

Now, we are once again at another inflection point. Will the S&P breakout or rollover? A sustained breakout would be fueled by many stocks that have crashed over the last 18 months and sustain a rally in the indices for several weeks or months. A rollover to the downside would likely begin next week and need to takeout the 12/22 low ($375) to confirm this scenario.

In either scenario, it looks as though the tone of the stock market will trade in 2023 will be established in the coming 1-2 weeks.

Don’t Forget About The Yield Curve

The yield curve is also providing some relief as longer tenor yields have fallen compared to last month (grey line). Treasury auctions have been going well but the shape of the curve still warns of a contraction but that may not come until 2024.

Chart of the US Treasury Yield Curve by @kiscocap.

Economic Data

  • The PPI (producer-price index), rose 6.2% in December (YOY) which is the slowest annual pace since March 2021. November’s number was also revised slightly lower in this report while the Core PPI was up 5.5%. A good sign that inflation is abating and you can see the sharp reversal in the chart to the right.
  • A drop in imports as measured by container shipments coming through the port of Long Beach (CA) suggests supply chain disruptions may be easing as inflation erodes In the chart below you can see that CPI has a decent correlation with the amount of imports so this is another sign the supply chain is healing.
CPI vs Imports
Freight Spending
  • Freight-payments group Cass Information Systems says inferred rates in its Cass Freight Index fell 2.2% in December and that U.S. domestic shipping prices are on track to fall 5% this year. According to Xeneta, spot container rates from Asia to the U.S. West Coast were down about 80% in December from the year before, and contract rates are also declining as evidenced in the chart on the right.
  • Germany’s PPI in December was up 21.6%, above the estimate of up 20.7% but a slowdown from the 28.2% spike in November. The ECB has some catching up to do in the Euro zone.
  • The January NY manufacturing index plunged to -32.9 from -11.2 in one of the worst readings since since March of 2009.
US Retail Sales
  • U.S. retail spending fell 1.1% in December (MOM) at the sharpest pace of 2022 according to the Commerce Department said Wednesday. Sales were also revised lower in November and have fallen three of the past four months. (WSJ)
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.