A significant week as the Fed, Bank of Japan (BOJ) and the European Central Bank (ECB) all raised rates to combat inflation. We also got better than expected GDP and earnings reports are flooding in with mostly decent news so the soft landing scenario remains a possibility (but has never happened). The markets will now trade on earnings outlook and the August inflation data before the next Fed policy statement on September 20th.
Stock Market Charts
The shorter term charts are not as clear as this weekly chart below (each bar is one week) but the S&P has moved higher the past few weeks and is now approaching resistance at the March 2022 high ($462). With the central banks out of the way, we have about seven weeks for the market to trade without outside interference.
It wouldn’t be a shock to see the advances get harder as we near resistance but this chart could be the early innings of the next major advance in the S&P. However, to confirm this we need to recapture new all-time highs ($481) and continue to see inflation numbers dissipate.
The Yield Curve
The fly in the ointment for equities is the shape of the yield curve which is deeply inverted. The track record for inversions indicating a recession is near perfect but it is a poor timing mechanism. Historically, a recession happens within two years and we are just starting year two of an inverted yield curve. This means there could be a window where stocks rally into 2024 but that would mean the Fed finds a terminal rate this year. We can expect a decline in equities when the Fed begins to cut rates.
Economic Data
- GDP rose 2.4% in Q2 which was better than expectations of 1.8%. Consumer spending and strong business investment were drivers in the second quarter.
- The BoJ essentially widened yield curve control to 1%, acknowledging implicitly that inflation is running at double their target. The move sent Japan’s 10-year yield to the highest level since 2014,
- The European Central Bank (ECB) raised its key interest rate to a 22-year high of 3.75% from below zero a year ago. The Euro zone continues to suffer from lackluster growth and higher inflation compared to the US.
- Personal spending in June exceeded expectations with a 0.5% monthly gain, one tenth above the estimate and May was revised up by one tenth.
- Pending home sales were up 0.3% in June after three straight months of declines. The rebound was mostly led by a 4.3% increase in the Midwest. The National Association of Realtors said “The presence of multiple offers implies that housing demand is not being satisfied due to lack of supply. Homebuilders are ramping up production and hiring workers.”
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Paul J McCarthy III CFA
President, Kisco Capital
