The Fed is getting their way as rate increases are cooling job growth. On Friday, the payroll number for July came in lower than expected at +187K and you can see on the adjacent chart the emerging trend.
Despite the declining job growth, wages continue to rise at an annualized rate of +4.4%. Not something that helps get inflation back to the Fed’s 2% target.
Let’s not forget that the U.S. Government is running a large deficit which contributes to inflation. And this deficit will grow if tax receipts falter if unemployment rises. So, the Fed may have created a negative feedback loop as fighting inflations means cooling the labor markets, wages and then tax receipts. If this is going to get fixed, the government and the Fed need to work together like they did in the 1980s.
So, there is now a potential bump in the road for stock and bond markets. As you can see in the chart to the right, longer tenor bond yields are rising (blue line). And this may reflect a hard landing developing in the coming months if the negative feedback loop metastasizes.
One of the saving graces over the last year has been that longer tenor yields have held at a reasonable level. Seeing the 10Yr over 5% will begin to stress the credit markets as refinancing bonds and real estate gets harder. So, watch the 10Yr as that may be the tail that wags the dog.
The Stock Market
So, what is the stock market doing? There have been many technical analysts warning that the rise in equities this year is a bear market rally. If that is true, we will see evidence of that in the coming weeks. In the chart below, the S&P has retraced most of the decline in 2022 and is now starting to run out of gas.
The previous peaks in January/March of 2022 are “supply zones” where previous buyers unload positions that have been underwater over the last 18 months. That means an advance to new highs will be a bumpy ride if this is a new multi-year uptrend. We saw evidence of strong resistance in this week’s price action as the S&P failed to re-test the March 2022 peak at $462. Also, the momentum indicators at the bottom of this chart are on the verge of rolling over so there may be a pick-up in volatility as we head into September.
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Paul J McCarthy III CFA
President, Kisco Capital