Media Appearance: I was on the Schwab Network this week to discuss the earnings of Walt Disney and Warner Brothers Discovery and you can see the hit HERE.
It was a relatively uneventful week until we got a speech from Fed Chair Powell on Thursday where he reminded the market that this rate cycle is not dead. This was also followed by a weak 30Yr Treasury auction and a decline in equities. However, the stock market mustered a rally on Friday only to have Moody’s Investor Service issue a ‘Negative Outlook’ on the credit of the United States. You can see the headlines below:
The timing is no coincidence as a showdown in Congress is brewing over funding the government and the deadline is next Friday. A stopgap measure may be passed to kick the can down the road but we have a new Speaker of the House and that throws uncertainty into the outcome of the negotiations. However, the real issue is the deficit spending that will get worse in the coming year especially if the economy slows and tax receipts decline. Unless there is a solution soon, we will likely live with a large deficit until after the next Presidential election (2025).
Bonds
This does not help the inflation outlook as sustained deficits push interest rates higher over time. This must be a frustrating moment for the Fed as they may have to get more aggressive as Powell reminded us this week in his speech.
If we check in on the 10Yr yield below we can see a 6 week consolidation around 4.6%. One thing to keep in mind, if yields on the long end begin to fall that may be signaling a slowdown in the economy. It would be easy to misinterpret this as a signal that inflation is under control and signal an end to this rate cycle. However, Fed and monetary policy changes work with long lags and the effects of the rate hikes over the last year are likely just settling into the marketplace which means the economy should be hitting the brakes.
The S&P 500
If you bought the rally on Friday, the Moody’s downgrade after the close was not welcomed. As you can see in the chart below, the S&P 500 has rallied sharply, causing three gaps in this chart and an overbought condition with a negative divergence in the RSI. FYI, gaps in charts are frequently filled meaning lower prices may be in the near future.
Momentum was strong into the close on Friday but there is the potential for some negative catalysts next week. Aside from the debt ceiling drama, we will get another read on Consumer and Producer prices which may remind us how difficult it is to stomp out inflation.
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President, Kisco Capital