We got another inflation read on Friday with the Personal Consumption Expenditures (PCE) and it came in as expected at 2.5% and nobody cared. The inflation data is not what the markets are focused on right now as we are in the heart of Q2 earnings season plus we have a Fed meeting next week with payrolls on Friday. Also, the bond markets are finally pricing in rate cuts for later this year and although there may be still some concern for inflation to re-emerge it certainly doesn’t seem likely in the near-term unless the price of oil skyrockets.
The Shape of the Yield Curve
The shape of the yield curve is good at foreshadowing moves by the Fed and what is notable below is that the T-Bill rates are beginning to fall (left side of the blue line). You can see the divergence from the yellow and grey lines from earlier this year which means a rate cut is imminent. Most likely a 25bps cut in September but some prominent economists are beginning to bang the drum of sooner rather than later.
Yields for long bonds have been rallying for months as we see the 5Yr leading the way lower which is a tenor closely watched by bond traders. We started this year with many economists calling for several rate cuts but the yield curve never priced it in like we are seeing now. You can see the blue line above shifting lower in comparison to previous months and this is likely to continue into 2025.
The 10Yr Treasury Yield
The chart below shows the path of the 10Yr Treasury yield since the March 2020 low. This uptrend ended last October and now we are correcting this long-term uptrend. This chart tells me that the 10Yr is going below 4% and maybe as far as 3.24% in 2025. Why? It could be from inflation abating or maybe the economy slows down or a combination of both. We will have to wait and see but there should be some fireworks for bond traders going into 2025.
The S&P 500
Historically, stocks don’t do so well when the Fed begins cutting rates. But that typically happens on a lagged basis meaning if they cut in September it may take a few months before there is a hard landing. For now, the last two weeks have been very choppy with the market leading semiconductor index is down over 15% from its most recent high.
Earnings reports will be very heavy the next two weeks and some companies are putting up good numbers so this uptrend may be working off an overbought condition that was created on the RSI on July 8th. So, if earnings make the market happy there could be new highs in the coming weeks.
For next week, the Fed is likely to keep rates on hold while investors focus on earnings guidance into the end of the year. The wild card could be the jobs report on Friday so it will be a busy week as there may be a lot to digest in the coming sessions.
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Paul J McCarthy III CFA
President, Kisco Capital
