Watch The Yield Curve

The seasonally weakest part of the calendar for the stock market is the next two weeks and lucky for us we have a Fed meeting on Wednesday to get a report card on their next policy step (or mistake). The Fed will not have an easy time at this meeting as the inflation data this week was a disappointment and keeps the door open for another rate hike. The biggest challenge in taming inflation comes from the Federal Government which is now running a massive 6% budget deficit which acts as a countermeasure to the Fed’s hawkish policies. What to do?

Pushing On A String

Will another hike of 25bps do anything? I doubt it. The Fed’s shock and awe campaign over the last year worked as a first step and now time is needed to digest this monumental policy shift from zero interest rates. One recent notable is that the curve is flattening as you can see in the chart below.

Long yields have been rising as the Treasury Department increased the sizes of their upcoming auctions over the summer which means there is a big seller in the bond market. Public companies are also taking notice as debt issuance since the Labor Day holiday has been quite high and don’t forget about the $54B IPO of semiconductor ARM holdings (another form of selling). These companies are likely concerned that liquidity could dry-up if/when long yields continue to rise so they are hitting the market while buyers ask for more.

Oh Yes, Equities

The Artificial Intelligence mania (Chat GPT) over the summer gave life to technology stocks and helped the S&P 500 break out in June and make a high for the year in July. However, this euphoria may be short lived. It was reported on Friday that one of the world’s largest computer chip makers, Taiwan Semiconductor, was asking equipment vendors to hold off on deliveries due to concerns over weakening demand. Looking back on this week, some of the biggest losers were semiconductor stocks so profit taking and a concern on a potential peak in this sector is now a risk to the broader market as this leading sector may now be in jeopardy.

If we look at the chart above of the S&P 500 we can see a high for 2023 that fell short of the March 2022 peak (‘2’) and then a fall in August down to the 2022 high (‘B’). Since then, the S&P has been mostly rangebound but has closed lower these past two weeks (the last two red bars on the right). The momentum indicators at the bottom of the chart are also pointing lower which means additional selling looks to be in store for next week. The Fed meeting on Wednesday is shaping up to be a catalyst based on the recent chart patterns in the S&P so there will likely be a good deal of attention on the capital markets next week.

Paul McCarthy 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.