Summer is Coming

There are many trigger point to discuss regarding risk but sometimes the market doesn’t care and it goes higher. We did get some good news with the Q1 GDP revision and recent economic data that points to business investment accelerating which is needed to grow the economy. GDP prints in Europe seem to be picking up so we can’t ignore that, either. We have spent the last few months going sideways so we may be poised for a sustained move higher into the Fall where I expect policy changes to healthcare and taxes to give the market its first clue on how to consider market direction for 2018.

For now, it seems the market is looking past potential policy changes and focusing on profits and growth – which are good for Q2 outside of retail and energy. We can’t forget about managing risk if we melt-up into the summer months. So, here are a few risk triggers brewing that may be in the spotlight as we approach the winter months: student loan debt, subprime auto debt, muni debt (Puerto Rico), Italian banks, Canadian real estate bubble, Japan burning its currency, China’s version of levered financial products (think CDOs) and the Federal Reserve raising interest rates.

See the Chart Time! section below for how some of the major indices performed this week and how they are trying to break out of a multi-month malaise.


Economic & Central Banking Snippets

  • Employers added only 138,000 jobs in May which was below expectations of 182,000. In addition, April’s gain was revised lower to 174,000 from 211,000. The miss in May payrolls was concentrated in two categories, manufacturing (-1,000) and state and local government (-17,000). Labor supply constraints may be holding back job growth more than labor demand, as the unemployment rate fell to a sixteen-year low (4.3%) and wage gains firmed after adjusting for the calendar bias, as business complaints of labor shortages have become increasingly widespread. Whatever chance was seen as remaining of the Fed not hiking in June should be gone now. (Morgan Stanley/FT)
  • Home prices appreciated year-over-year for the 59th consecutive month in March. The appreciation also accelerated for the 9th month in a row after decelerating from February through June of 2016. According to Case-Shiller, home prices are appreciating at their fastest annual pace since June 2014 and now sit 2.4% through prior bubble-era peaks. (Morgan Stanley)

Case-Shiller U.S. National Home Price Index


  • The consumer confidence index in the Conference Board’s survey fell a point and a half in May to 117.9 versus other surveys holding near cycle highs, which compares with a sixteen-year high of 124.9 in March and a pre-election level of 100.8 in October. (Morgan Stanley)
  • A key measure of US inflation fell for a third straight month in April as the core personal consumption expenditures price index (PCE) eased to a yearon- year pace of 1.5% for April according to the Commerce Department. The core PCE, which excludes the volatile food and energy components, is the Fed’s preferred inflation reading and policymakers have made a 2% target for the gauge a key factor when weighing interest-rate moves since the financial crisis.
  • The Commerce Department also said that both personal income and spending rose 0.4% in April, in line with Wall Street’s expectations, and bouncing back from a weaker March reading of 0.2%.
  • The ISM composite index (manufacturing growth) ticked up to 54.9 in May from 54.8 in April. The May level and year-to-date average of 56.1 have historically been associated with about 4% growth in real GDP. That’s not likely, but it indicates that manufacturing has moved back into a leading position in the recovery. The orders and production components showed continued strong growth, while employment picked up.
  • France’s economy grew faster than expected for Q1 at 0.4% but still fell below the eurozone’s average of 0.5%.

Real GDP for France


  • South Korea’s industrial production rose 1.7% in April compared to a year ago, according to Statistics Korea. This marked the second straight month of slowing growth and fell far short of a median forecast predicting a 5% rise from economist polled by Reuters. The softness in production growth comes after South Korea’s economy expanded faster than expected in Q1.
  • Japan’s industrial production clawed its way back into expansionary territory in April after dipping into contraction for March. The preliminary reading showed industrial production rose 4% month on month in April, bouncing back from March’s fall of 1.9%. The ministry said the rise was driven primarily by growth in production of transport equipment, machinery and electronic devices and components, in that order.
  • New data out on Tuesday revealed US consumer spending grew at its quickest pace of the year in April, suggesting the world’s biggest economy was shrugging off political turmoil and is again poised to lead a global recovery. Consumer spending is the key driver of the US economy, and a slowdown earlier in the year held gross domestic product growth to an annual pace of just 1.2% in Q1. On Monday the Atlanta Fed said the stronger data helped its closely followed GDP tracker project second quarter growth of a robust 3.8%.
  • Canada’s economy roared back to life during Q1, with rising oil production and strong consumer spending driving one of the broadest-based recoveries seen in recent years. The country’s GDP grew at an annualized rate of 3.7% in Q1, Statistics Canada said on Wednesday. It is the second strongest quarterly reading in nearly three years.
  • Portugal’s economic recovery gathered pace at the beginning of the year, underpinning forecasts that 2017 will be the former bailout country’s strongest year of growth in almost two decades. Quarter on quarter GDP expanded by 1% in Q1, lifting year on year growth to 2.8%. The performance places Portugal almost on a par with Spain, the eurozone’s star performer for Q1. (FT)

Real GDP for Portugal


  • Coming next week: Monday: ISM services and factory orders at 10am. Wednesday: consumer credit. Thursday: weekly jobless claims. Friday: wholesale inventories. (Caldaro)


Politics! Politics! Politics!

  • Because the House bill to repeal and replace the Dodd-Frank Act is running into resistance in the Senate, Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, said he is prepared to negotiate. Hensarling said he is receptive to separate votes on relaxing requirements imposed on community banks and raising the threshold for designating banks systemically important. (FS Core)
  • Despite controversy surrounding an overhaul of the Dodd-Frank Act, lawmakers on both side of the aisle agree the $50 billion line that divides big and small banks should be changed. The problem lies in agreeing on a different number.
  • After Brexit: FT research reveals that at least 759 agreements with 168 countries must be renegotiated just for the UK to maintain the status quo post- Brexit. There’s a long road ahead. (FT)

UK will lose international arrangements


  • Russia will lift most of the sanctions it had imposed on Ankara after the Turkish military shot down a Russian fighter jet over the border with Syria 18 months ago. The move will bring some relief for Turkey’s struggling economy. (FT)


Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)


Dow Jones (DIA)
Dow Jones (DIA)




Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)


10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX


Market Snippets

  • Big banks are throttling back from the $1.2T US car loan market, fearing that consumers have taken on more debt than they can handle. Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17T at the end of Q1, according to the New York Federal Reserve, up almost 70% from a trough in 2010. But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. (FT)
  • Global seafood will lose its status as the only remaining food sector supplied chiefly by nature, as businesses pour investment into fish farming. Farmed fish production is expanding 4 to 5% annually, putting it on course to eclipse the output of wild fishing as soon as 2019, according to the UN Food and Agricultural Organization. Demand for fish used in animal feed has also increased while the volume of fish caught in the wild has been stagnant since the early 1990s.
  • Michael Kors said that its comparable-store sales tumbled 14.1% in the fiscal fourth quarter that ended on April 1, worse than the 13.4% fall Wall Street analysts forecast. (FT)
  • A US spacecraft will swoop inside the Sun’s corona, its superheated outer atmosphere, on a pathfinding mission to learn more about how stars work. NASA’s $1.5B Parker Solar Probe, which will be protected by a shield that can withstand temperatures of 1,400C, will journey within six million km of the Sun’s surface, seven times closer than any previous spacecraft. “We will finally touch the Sun,” Nicola Fox, senior mission scientist, told a conference in Chicago at which Nasa gave a progress report on the spacecraft planned to launch next year.
  • SpaceX blasts off Elon Musk’s company will launch its sixth rocket trip this year to the International Space Station under its $4.2B Nasa contract, but it plans four more for June as it seeks to increase the pace of flights to bring down costs. (ArsTechnica)


International Snippets

  • Just when it looked like Volkswagen’s (OTCPK:VLKAY) Dieselgate scandal was coming to a close, the German government has alleged Audi (OTCPK:AUDVF) cheated on emissions tests for nearly 24,000 A7 and A8 models. Audi was quick to respond to the allegations and announced it will recall around 24,000 vehicles because they can emit excess NOx emissions during “certain driving conditions.”

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.