Stagflation

Inflation is for the Stags

“I don’t see the stag, or the ‘flation.”

Jay Powell, May 1st, 2024
QRA

An eventful week on Wall Street that started out with an announcement by the US Treasury that they will need to borrow more money due to lower than expected tax receipts. They will now need to issue $243B in bonds which is $41B more than their initial projections. This also reminds me that GDP for Q1 fell short of expectations (1.6% vs 2.4% exp.) so the lower tax receipts may be a sign of slower growth.

As you can see in the chart above, the US Treasury is issuing more debt today than it did during COVID where the economy and tax receipts plummeted. Issuing this much debt is inflationary if it continues and not a good thing for the Fed as they combat rising prices.

The Fed Meeting

“Inflation is still too high, further progress in bringing it down is not assured, and the path forward is uncertain.”

Jay Powell, May 1st, 2024
Inflation

The Q&A by Powell was far more interesting as you can see from the quote(s) above and there does seem to be uncertainty from the Fed as what they will do next with interest rates. For now, they remain unchanged. However, they did slow down the pace of bond sales from $60B to $25B monthly and will no longer re-invest in mortgage backed securities.

The balance sheet change was expected but a bit larger than projections. Perhaps, this was done out of concern for growth as GDP underperformed in Q1 and the consumer is showing early signs of weakness when you look at credit card and auto delinquencies. The jobs numbers on Friday also did show an uptick in unemployment and a weaker than expected increase to hiring so maybe that is an early signal of the economy slowing but a bit early to confirm.

One notable this week from the Institute of Supply Management (ISM), is their survey on services contracted in April for the first time since December 2022, ending a period of 15 consecutive months of growth. Services have been the driver of inflation as manufacturing activity has been in contraction for some time so that would be good if it also didn’t mean that business activity is slowing.

Some Charts

Now it becomes a waiting game to see how stocks and bonds react to this news as it evolves and every data point from now until the next Fed meeting in June will be parsed by the market. For now, earnings season is underway and it has been a bit of a mixed bag.

The S&P has held up this past week and bounced higher from the 21day EMA (green line). However, the momentum indicators at the bottom are weakening so we will have to wait and see if this pullback is over or not. The MACD indicator at the bottom doesn’t cross very often so the sellers may re-emerge in May.

S&P 500 by @kiscocap

The 10Yr Treasury yield did fall this week as the economic data did indicate a potential slowdown and if that becomes a trend then yields on long bonds should continue to fall. I have a target of 3.24% in the chart below but that would take many months to play out. A move below 4.3% in the near-term and the odds will rise that we printed the high yield on the 10Yr for 2024.

10Yr Treasury Yields by @kiscocap
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.