US Yield Curve by Kisco Cap

Back to the Resistance Zone

A stagnant week in the stock market as the technicals show the S&P 500 is now hovering at a price level that has been revisited several times over the past year. In the chart below, you can see that the $418 (23.6% FIB) level is this barrier that was only crossed last August (‘B’) in a failed breakout. So, we are again at this level amid earnings season where profits for S&P 500 companies are expected to be down 6.4% compared to last year so we will need many upside surprises to punch through technical resistance.

If investors throw in the towel at these levels, we may experience an accelerated move to the downside as I can see the momentum indicators at the bottom of the above chart beginning to turn lower.

The Yield Curve

The yield curve remains inverted and warns of a slowdown in the economy. If we look at a recent survey of economists on the right, we can see there is a growing consensus that a recession will occur within the next year. This high of a result is rare and we have not seen this level since 2008 (excluding the pandemic). Earnings are slowing down and we are seeing issues on bank balance sheets due to the swift change in interest rates so the seeds of a slowdown seem to be taking root.

Notable in the in the yield curve this week is where 1-month T-Bills are trading now. The dramatic drop in this tenor does warn of an imminent risk of something breaking but it is difficult to know the cause until after the fact (or news is announced). Perhaps, it is caused by bank depositors buying money market funds to get more yield which would normalize once banks started paying higher interest rates to depositors. Or, perhaps banks do not want to lend to each other due to balance sheet concerns and are buying T-Bills as a substitute which would be a much bigger issue. In either case, this is an abnormal situation and should be watched closely.

Economic and Banking Data

  • The smaller banks that serve a wide swath of America’s consumers and businesses are starting to pay up to keep their deposits. Main Street banks such as Citizens Financial Group and First Horizon said in first-quarter earnings reports they are having a tougher time hanging onto customer money in a world where the Federal Reserve has aggressively raised interest rates. To keep those depositors around, some lenders are paying more on savings accounts and turning to products like certificates of deposit. (WSJ)
  • China’s economy grew by 4.5% in Q1 as consumers drive demand higher as evidenced by March’s retail sales accelerated to a 5.8% gain.
  • Japan saw a 4.3% increase in exports for March which was driven by autos.
  • The Beige Book, a survey of economic activity released by the Fed, reflected widespread credit tightening. The report also raised concerns about liquidity and uncertain expectations for future growth. As you can see on the chart to the right, C&I loans originations are beginning to fall.
  • Compared with a year earlier, median prices in March were down 0.9%, the National Association of Realtors said—meaning consecutive down months for the first time in 11 years. Sales of existing homes in March were down 2.4% from February and 22% from a year earlier, as higher mortgage rates squashed momentum.
  • Existing Home Sales in March totaled 4.44mm as prices fell 0.9% YOY which is the first decline since February 2012. Prices are rising in the regions that are seeing job growth and housing is more affordable “however, the more expensive areas of the country are adjusting to lower prices.” Months’ supply, reflecting the still tight inventory, was 2.6 for a 2nd month.
Paul McCarthy, President of Kisco Capital, LLC

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Paul J McCarthy III, CFA

President, Kisco Capital

Paul McCarthy

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