I have noticed that the leaves are turning early here in Westchester NY in a sign of transition to cooler weather and we may be seeing that in the coming weeks on Wall Street.
On Friday, we got another weak read on the labor markets as the August nonfarm payrolls (NFP) came in at a paltry +22k which guarantees a rate cut by the Fed at their next meeting on September 17th. We will get two reports on inflation data (CPI/PPI) this week which could be a concern if they disappoint. However, Fed Chair Powell has suggested a greater concern about employment over inflation as he sees an unusual underlying weakness in the labor markets as both the supply of workers and the demand for them are declining simultaneously. So, that signals to me that labor data will be driving rate decisions for the near future.
However, the real story for markets may be on Tuesday with the Current Employment Statistics (CES) Benchmark Revision Announcement which is updated annually. This report takes the monthly nonfarm payroll data, which is based on employer surveys and other inputs, and reconciles it with more complete unemployment data. The process often results in sizable and often negative revisions to prior payroll estimates. So this will be closely watched as the payroll data reported by the Bureau of Labor Statistics has recently come under scrutiny for its large revisions.
Historically, CES benchmark revisions have occasionally revealed that the labor market was significantly weaker than originally reported. Large negative revisions can shake investor confidence, alter Fed policy decisions, and shift sentiment in different asset classes. In past cycles, such revisions have even triggered debates about whether payroll data overstated job creation during key turning points in the economy. Stay tuned on this data as it will be a focal point of the current administration.
The S&P 500
Stocks love low interest rates so the S&P ended up higher on the week. Lately, there has been a lot of talk of a correction on the horizon or that market valuations are too high but we can see we already had a sizable correction in April. As of the close on Friday, we are not overbought on the RSI in the weekly chart below and the MACD momentum indicator remains pointed to the upside. We are riding an upper trend line but as I mentioned in my previous post, Back To School, there is an overhead Fibonacci extension at 6975 which could act as a magnet for the S&P later this year.
10Yr Interest Rates and the Yield Curve
As you can see, 10Yr yields have been trading sideways for 2+ years. The most recent moves tell me that the yellow wave ‘4’ may still be unfolding and re-test where 10Yrs were trading one year ago (‘ALT 4’).
However, if we consider the shape of the entire yield curve below, we can see 30Yrs are stuck up near 5%. Longer tenor yields reflect better longer-term factors such as budget deficits, high government debt and inflation trends. This may be signaling that 10Yrs will have one more dip in yield before a rebound closer to where 30Yrs are trading.
This all adds up to a lot of drama in the coming months as both stocks and interest rates may be getting ready to test extremes before reversing direction.
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President, Kisco Capital
