An uneventful week in the US financial markets as stocks and bonds retrace their advances over the last several weeks. Several Fed Governors were on the speaking circuits this week including Powell who gyrated the market on Tuesday. The CPI/PPI numbers are released next week and will give another progress report on the Fed’s efforts to stem inflation. The technical picture is still in focus for most market participants so let’s check the chart.
The Stock Market
As you may recall, the S&P 500 broke a trend line in January (green line) that had existed for over a year and in the coming weeks we will see if this breakout will hold. If the pullback that started this week can make a new monthly high ($418) then we will begin to carve out a new uptrend. The trading for the rest of this month will be significant in setting up how the S&P trades this Spring. And maybe the inflation data next week will act as a catalyst – one way or another.
The Bond Market
Bond prices can get overbought just like stocks and this week we are seeing a retrace (higher yields) as shown by the blue line below compared to the grey line last month. The yield curve has moved quite bit in the last three months (yellow line) and the inversion means something bad will happen in the next year or so. However, no credit cycle looks imminent given how well corporate bonds have priced over the last several weeks so a slowdown may be a 2024 affair. And if yields hold in this area after the inflation numbers next week then the Fed will follow the market and be close to a terminal rate as evidenced by the flatness of the blue line inside of the 1Yr tenor.
Economic Data
- The February Consumer Confidence Index rose slightly to 66.4 and the University of Michigan said “Overall, high prices continue to weigh on consumers despite the recent moderation in inflation, and sentiment remains more than 22% below its historical average since 1978.”
- The Atlanta Fed’s January Wage Growth Tracker reported a 6.1% increase which is running high compared to the pre-COVID average of 3.5%.
- Consumer Credit in December rose $11.6B and well below expectations of $25B.
- State governments are entering 2023 with record-high reserves, which could help the overall economy weather a recession this year. Unlike the federal government, most state and local governments must balance their budgets every year. That means that a fall in tax revenues must be offset, most often by cutting spending and laying off workers, which exacerbates economic downturns. (WSJ)
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