Cruise Control?

The financial markets have a lot of moving parts right now with manufacturing in contraction and services industries in expansion. The good news is that labor markets have held together despite the sharp rate increases over the last year. Not to mention inflation numbers are coming down (more below) into an area where the Fed should hit the brakes on the rate increases. However, the lagged effects of the rate hikes may not be known for several more months so the labor markets and earnings outlook will be closely scrutinized into the Fall months.

The Stock Market

In late May, the S&P began to break out of a two year topping/consolidation process in a sign that the Fed was close to the end of this rate cycle. For now, it looks as though the S&P may make a run at another new all-time high but it is still possible stock markets fall short if there is a surprise at the Fed meeting on the 26th. For now, equities look good and the momentum indicators at the bottom of the chart are pointed higher. A break below the August 2022 high at $432 would be a warning sign of a larger correction.

The Bond Market

The yield curve remains deeply inverted and we have seen longer-tenor yields fall this month as inflation expectations wane (now unchanged from one month ago). The Fed is priced to go 25bps later this month but the September meeting is a toss-up after the better than expected CPI/PPI data this week.

Lower rate volatility is good for borrowers so corporate debt issuance may pick up in the coming months if long yields keep falling.

Economic Data

  • The split in the economy shows up in the graphic to the right. The ISM (Institute of Supply Management) surveys show that manufacturing is in a recession while services are turning higher and in expansionary territory. A divergent reading and the bears will say that manufacturing has historically acted as an early warning of the state of the economy.
  • The University of Michigan’s July consumer sentiment index surged to 72.6 from 64.4, well above the consensus of 65.5. The recent fall in gas prices and rise in stock prices is liked by the consumer.
  • Consumer Prices (CPI) have fallen from 9.1% in June of 2022 to 4% in May and 3% in June as reported this week. Fortunately, consumer prices have fallen without a weakening of the labor markets which is the “soft landing” scenario discussed among economists.
  • Producer Prices reported this week came in lower than expected at 2.4% which you can consider as inflation in the pipeline. So, this means prices for consumers should trend lower in the coming months. Pre-COVID, the PPI was at 1.5%.
Pantheon Economics
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.