After four weeks of falling the S&P 500 finally closed higher (slightly) after a better than expected jobs report for August acted as a catalyst for a rebound in Friday’s session. A strong labor market is good for the economy but wages are poised to go higher and that means the Fed has more work to do with interest rates as inflation pressures look to rise. Eventually, rising yields will catch up with the stock market as many companies missed the window to lock-in 1-3% interest rates. For investors, they have seen the value of their Treasury holdings drop 25% over the last three years and don’t forget commercial and residential debt prices have fallen by greater amounts.
The 10Yr Treasury
The 10Yr is doing the bidding of the Fed as we hit 4.887% in Friday’s session and the chart below shows 5% is right around the corner. This means the Fed could hold off on raising the Fed Funds Rate and let the long end of the yield curve rip higher but there will be consequences for financial institutions and real estate markets.
In the chart above, we can see that an overbought condition exists so bond prices could rally next week but the trend is higher for 10Yr yields and that should continue into 2024.
Cash is King
Draining the world of money is no easy feat. Especially after a dozen years of near zero interest rates that spurred on debt creation. And let’s not forget all the overseas countries that ran negative interest rates during this time period. Now inflation has cornered the central banks into the same policy direction. The byproduct you can see in the adjacent chart – that all of the major economies are shrinking their money supply. This combats inflation but it also means liquidity is being sucked from the global financial markets. The fall in the money supply could be sowing the seeds of the next financial crisis so this is something to watch as this trend will continue as 10Yr yields rise.
The S&P 500
Stocks found their footing on Friday after the jobs number but the rebound was from oversold conditions so it needs follow-thru next week to consider we may have a temporary bottom. I also think bond yields need to fall to get stocks going to the upside so we will see if that happens. Prices did stop at the 55-day moving average (yellow line) and seasonality turns positive for the rest of October so there could be a trade to the upside brewing.
However, the momentum indicators at the bottom of this chart are pointed lower so there is a bit of a mixed technical picture which should get cleared up next week.
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President, Kisco Capital