AN UGLY DAY, THE RESULT OF RISING INTEREST RATES

Led by technology, stocks fell across the board as Treasury yields surged amid a ramp up in speculation that central banks will have to boost interest rates sooner than earlier anticipated.

The Dow ended lower by 1.5%, the NASDAQ 2.6% and the S & P 500 1.85%.  All but one of the 11 industry groups in the S & P 500 fell, energy being the exception.  Ninety percent of S & P 500 members declined.  The NASDAQ has violated its 200 day moving average, a key technical level, for the first time since March 2020 according to Bloomberg.

Speaking of energy, crude is staging an unrelenting advance for a myriad of reasons.  In the immediacy there are geopolitical tensions.  Ukraine, Kazakhstan, Azerbaijan, and the UAE are front and center.

Longer term, the nominee for Fed Vice Chairwoman, Sarah Raskin, has written extensively about using the Fed’s vast supervisory powers to massively curtail money center bank lending to the fossil fuel industry.

I cynically ask does the Fed now have a tri mandate?  Maximum employment, price stability and climate change?

Will oil soon surge to over $100 barrel because of geopolitical tension in Ukraine, Kazakhstan and Azerbaijan amplified by a new Fed mandate?

The start of 2022 has been tough with only two sectors posting gains…energy up 16.7% and the financials up 3.9% as per Bloomberg, the result of inflation and rising interest rates. Bloomberg also writes the last time energy outpaced technology by 20% or the amount of today was 2000/2001.

Last week I commented at this juncture surging inflation is positive for the federal budget.  Nominal wages are rising causing bracket creep.  Moreover, higher good prices dictate higher revenue based taxes.

The WSJ wrote yesterday that federal receipts for the first quarter from October to December increased by a remarkable 31% or $248 billion to $1.05 trillion for the quarter.

Individual income taxes soared by 55%, corporate taxes rose by 44% and payroll taxes up 16%, all the result of strong growth in nominal GDP and 7% inflation.

The issue at hand however for the quarter federal outlays increased 6% or $75 billion to a record $1.43 trillion.

The proverbial elephant in the room is the rise in interest expense on the federal debt.  If yields continue to rise the debt service will assume a greater portion of the federal budget thus crowding out all other expenses.

I continue to believe Main Street may continue to outperform Wall Street as monies continue to gravitate back to companies that produce hard assets versus soft assets.

What will happen today as several mega sized firms post results?  Will the refrain of inflation impacting results continue?

Last night the foreign markets were up. London was up 0.32%, Paris up 0.70% and Frankfurt up 0.38%.  China was down 0.92%, Japan down 2.80% and Hang Seng up 0.06%.

The Dow should open nominally higher on earnings optimism as several mega sized financials exceeded expectations, the result of increased loan volume.   The 10-year is off 3/32 to yield 1.89%.  Oil is up another 1% on geopolitical tensions.

 

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