I hope everyone had a good summer and it seems like we are all back to school as the subject matter turns from inflation to growth. On the 18th, the Fed will begin to lower interest rates and flip into an easing cycle, however, the beginning of an easing cycle historically means that GDP and the jobs market are going to slow in the coming months.
If You Remember…..
The purpose of raising interest rates was to offset the rise in inflation which was caused by government spending and the Fed. You can see in the chart below that the Fed’s balance sheet ballooned to almost $9T in reaction COVID so drastic measures were warranted. As of today, we are back to 2020 levels as the Fed has divested its bond portfolios to in addition to spiking interest rates. Some would argue they haven’t gone far enough but the will of this Fed is not to topple the country into recession. Or is it too late?
Job Growth is Slowing
We got the August payroll report on Friday which was reported at +142,000 which is good but below expectations. However, the disappointing part was that the June and July reports were revised down by a combined 86,000. As the Fed’s tightening policy crosses the finish line, many are beginning to consider the lagged effect of interest rate policy and the buffer of government spending is masking a weaker environment that will deteriorate in the coming year.
That doesn’t fit with the soft landing scenario so the markets will be studying the economic data in the coming months as the Fed embarks on its easing cycle. Lower interest rates will help certain areas like real estate and finance but the leading sectors for growth like technology may not fare as well.
The S&P 500
The S&P 500 closed on Friday in the same place as they did on June 12th. The stock market has been churning in a range as interest rates fall and the yield curve begins to normalize. The volatility may remain with us for the rest of the month as September is not a great month from a seasonality perspective. In the short-term, we should see a bounce next week as many charts are getting deeply oversold and the chart remains pointed in a bullish formation unless we break the previous lows established in April and August.
The 10Yr Treasury Yield
The chart below of the 10Yr Treasury yield has a nice chart pattern that gives us a high predictive value that long bonds have some room to fall to 3.24%. At this rate, that could happen sooner than we think and once this phase is over we should see long bonds yield over 5%. However, this phase will take some time and may not be until 2026.
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Paul J McCarthy III CFA
President, Kisco Capital
