Rates Get REAL

February is seasonally not the best time of year for stocks and this year has been no different. The high of the month was on the 2nd and the market has chopped its way lower ever since. We did get a negative catalyst on Friday with the inflation data on the Personal Consumption Expenditures (PCE) – a more expansive read on prices than the CPI and the Fed’s favorite inflation measure. Compared to last year, the PCE came in at +5.4% with the core at +4.7% – meaning that we finally have a REAL core rate of 0% now that the Fed Funds rate is at 4.75%. This is what the Fed has been aiming for and this implies we should be nearing the end of this rate hike cycle.

The Bond Market

If we look at the yield curve we did not see a big reaction to the inflation data on Friday as the CPI/PPI did that job last week. After the PCE data, Fed Funds futures did price in an implied terminal rate of 5.45% in the coming months and the long bonds were largely unchanged. The high point at just over 5% on the 1Yr tenor moved very little in Friday’s session so the bond market behaved itself to close out the week.


Economists will tell you that changes in the Fed Funds Rate will take 6-12 months to show up in the data, however, there is a debate within the Fed as to wether this lag applies to the modern day economy. For example, rate increases appear immediately on credit cards or automobile loans. However, the effects are lagged in sectors like real estate and corporate debt. And I would say that the piper will be paid for weaker corporate credits and commercial real estate in the coming years. I mention this because debt write-downs are a strong deflationary force so if the Fed is trying to cause prices to fall that is on the horizon and will take time but it will happen. This also means they may have gone too far already.

Living in the Present: The S&P 500 Chart

After a major top you eventually see a rollover and a crash like we saw in 2000, 2008 and the pandemic. But not in this chart as we are in the same price zone as May of 2022 and the chart pattern looks more akin to a correction rather than a major top. If this is true, then the correction ended in October at “C”. However, we have to keep all options on the table given the whipsaw nature of the market and I will want to see the green trend line hold at $390 and the December low at $375. The next few weeks will be critical to how we trade for the rest of 2023.

Economic Data

  • The S&P Global PMI for February (manufacturing and services composite) rose to 50.2 from 46.8 showing slight expansion after seven months in contraction.
  • New Home Sales for January totaled 670k (620k expected) which is the best level since March of 2022. Lower mortgage rates helped home buyers.
  • Private sector income grew 7.9% verses last year in January (+1% higher than the previous month).
  • Following the NY and Philly manufacturing indices which remain in contraction, the KC region saw no growth with its activity index at zero.
  • US Q4 GDP was revised down 0.2% to to 2.7% as personal spending slowed to 1.4% from the initial read of 2.1%.
Paul J. McCarthy

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Paul J McCarthy III

President, Kisco Capital

Paul McCarthy

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