Final Countdown

The Final Countdown

March 2024 Payroll Data

High drama this week as some of the Fed’s committee members are commenting that rate cuts may not be necessary given the stubborn inflation and the strength of the jobs market. The speaking circuits were busy this week and some of the hawkish comments caused a plunge in stocks on Thursday. However, a strong jobs number for March on Friday (+303k) is a reminder that the Fed does not have a great reason to cut rates.

The Fed is running out of time when it comes to carrying this narrative of lowering interest rates. They still have work to do in unwinding the COVID stimulus as they still carry $7Trillion of bonds on their balance sheet and that the Federal Government is now running massive spending deficits. Not to mention legislation like the CHIPs Act will keep the government spending in the fray for the foreseeable future. In a perfect world, the Fed would be immunizing the government’s spending by selling bonds but this is not even considered right now.

The Prices You (Will) Pay

There is a well-known lagged effect to interest policy so there is an argument that cutting rates now would dampen the blow of a slowdown on the horizon as waves of corporate and commercial real estate debt come due in the coming two years. It also doesn’t help that consumers are still reeling from higher prices of what they buy on a daily basis.

In the chart below, I have the prices of several commodities that influence the prices of many consumer products (I am using futures contracts). The picture below does not lie. You can see since the start of 2024 that many commodities are turning higher (aside from cattle). In particular, crude oil has the most significant impact on transportation and that cost is passed directly to consumers. It won’t be long until rising commodities prices begin to turn up at the cash register. No deflation here.

Commodities Performance

Long Term Interest Rates

Below is a chart of 10Yr Interest rates and it seems the bond market is in the process of digesting the move from 0.37% to 5% in 3.5 years. The chart pattern below is fairly straightforward and mimics the gyrations we see in the stock market. A top at 4.993% was established last October and now we are in a three-wave corrective pattern (A-B-C) that should get the 10Yr near 3.24% which could take many months to complete. In the coming weeks, I expect the 10Yr will continue to climb closer to 4.5%+ before heading to lower yields.

10Yr Interest Rates

What will be the news that surrounds all of these projected chart pattern gyrations? I can think of several scenarios and it is likely we gain clarity by summertime. The next Fed meeting is at the end of April, FYI.

The Stock Market Doesn’t Care…

Stocks have continued to push higher this year with little corrective action, however, we did have a down week as you can see in the last red bar on the far right. You can also see that the momentum indicators on the bottom of this chart look to be curling lower so it does seem like we are nearing a larger pullback.

S&P 500

The stock market staged a decent comeback on Friday after the payroll number so a green open next week could mean there is still some upside left in this index.

Paul McCarthy, President 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.