The Fed and You

The Dow and S&P are ticking new highs despite the news out of North Korea and the weakening uptrend within growth stocks. We also saw the two worst performing sectors of 2017 (retail and energy), help push the overall indices higher as they bounce within their bearish down-trends. The growth companies in the NASDAQ are stalling out and have chopped slightly higher since June. Not a great technical sign (more in the chart below).

It is also September, which is a seasonally weak part of the year and we have the Fed meeting on Wednesday. This week is important as the Fed may begin to remove the punchbowl of low interest rates and quantitative easing that has been the lifeblood of debt issuance and stock buybacks. I doubt the Fed does anything dramatic but their statement on Wednesday may cause reality to set in for the broader markets that the party may be over.

We saw higher inflation readings this week which is what the Fed has “wanted” for some time so they may have painted themselves into the corner with their credibility. Can they keep this much stimulus in the system now that we have GDP near 3% and inflation readings picking up? Probably not. I am sure there will be some nervous Fed governors at this meeting as now they have to start facing the reality of the withdrawal of their polices in the coming months.

Don’t forget about all those promises of changes to tax policy and healthcare that ignited the Trump rally after the election. It will take a miracle for these to happen in 2017. A lot is riding on the next few weeks so expect some headfakes and a clearer picture of reality by early October. Good luck.


Economic & Central Banking Snippets

  • A Financial Times report estimates that the central banks in countries where QE has been employed hold $15 trillion worth of assets, $9 trillion of which is government debt. That amounts to 20% of all government bonds for those countries. This activity by central banks robs investors of safe yield assets, forcing them down the credit curve into junk bonds. (EWI)

Debt man's curve

  • The headline producer price index (PPI) rose 0.2% in August, below consensus of a 0.3% increase. The core PPI ex food, energy, and trade services also rose 0.2% for the month. According to the BLS, 75% of the increase in headline PPI is attributable to the index for final demand goods, which gained 0.5%. The increase in final demand goods prices was the largest since April, but was mostly driven by an increase in energy prices, which climbed 3.3%.
  • Core CPI rose a surprisingly strong 0.2% in August, keeping the year/year rate at 1.7%. With food up 0.45% and energy up 2.1%, headline CPI rose 0.41%, boosting the year/year rate to 1.9% from 1.7%.
  • China’s economy kicked up to a higher gear in August, setting the stage for a stronger GDP expansion in Q3 after the 6.9% pace seen in Q2. The recent strength of China’s performance has prompted a number of analysts, including to upgrade their GDP forecasts for 2017. (MARKIT)
  • Retail sales came in much weaker than expected in August, with headline sales down 0.2% and the important core retail control gauge down 0.2%. Eight of thirteen major categories saw increases in retail sales while five categories saw substantial weakness that dragged down the overall sales figures. The details: motor vehicles and parts (-1.6%), electronics & appliance stores (-0.7%), building materials, garden equipment & supply dealers (-0.5%), clothing & accessory stores (-1.0%), and non-store retailers (-1.1%), miscellaneous store retailers (+1.4%), general merchandise stores (+0.2%), sporting goods, hobby, book & music stores up 0.1%, health & personal care stores (+0.1%), food & beverage stores (+0.3%), gasoline stations (+2.5%), and food services & drinking places (+0.3%).


Politics! Politics! Politics!

  • The United Nations Security Council unanimously adopted new sanctions against North Korea on Monday after U.S. officials eased their demands in the quest for an endorsement of the measure by China and Russia.
  • A North Korean state agency threatened on Thursday to use nuclear weapons to “sink” Japan and reduce the United States to “ashes and darkness” for supporting a U.N. Security Council resolution and sanctions over its latest nuclear test
  • U.S. President Donald Trump blocked a Chinese-backed private equity firm from buying a U.S.-based chipmaker on Wednesday, sending a clear signal to Beijing that Washington will oppose takeover deals that involve technologies with potential military applications.
  • North Korea fired a missile over Japan early Friday local time for the second time in a month, defying rising international efforts to force it to abandon course.
  • U.S. Senator Elizabeth Warren said on Friday she has begun an investigation into Equifax (EFX)’s massive data breach and, along with 11 other Democratic senators, will introduce a bill to give consumers the ability to freeze their credit for free.


Chart Time!

There isn’t much change from last week’s charts for the DOW and S&P 500 so I just included the NASDAQ this week. This tech heavy index typically leads the stock market higher and it is now stalling out. Despite the S&P 500 and DOW ticking new highs, the NASDAQ is sending a message that its uptrend is weakening and may lead the market lower. The DOW has been leading us higher these past few weeks which tells me stock investors are seeking “safety” in the larger companies. Not a great sign for the overall market as stocks trend best when growth companies and indices like the NASDAQ lead the way higher. I expect an answer in the coming week or two when we have some clarity around the Fed meeting on Wednesday.


Market Snippets

  • Hurricane Harvey alone will reduce Q3 U.S. GDP by as much as one full percentage point, according to analysis by Goldman Sachs Group Inc. cited by CNBC. This report was released a day before Irma made landfall in Florida. Goldman’s analysis was based on preliminary estimates of damage and economic disruption from Harvey. Economists surveyed by the Journal are less pessimistic than Goldman, expecting that third quarter U.S. GDP growth will be lower by 0.3%, followed by no impact in the fourth quarter, and a boost of 0.2% in the first quarter of 2018. (Investopedia)
  • The Trump administration plans to introduce new voluntary guidelines for autonomous vehicles in a bid to increase flexibility for car and tech companies and speed the industry’s development in the U.S.
  • Apple will charge $999 for its new iPhone X with an edge-to-edge display and a facial-recognition lock. It was the highlight of the company’s most important product launch in years, a decade after the release of the first iPhone.


International Snippets

  • US insurer Chubb is to move its EU head office to Paris after Brexit in a move that will be seen as a coup for the French capital. Paris has struggled to attract big-name financial institutions that are moving some of their operations out of the UK. Many banks have chosen Frankfurt, while the insurers have selected Luxembourg, Brussels and Dublin. The company said it would continue to have a big presence in London.
  • Uzbekistan’s currency lost 48% of its value Sept. 4th, following an announcement that its exchange rate would no longer be tied to the U.S. dollar. The change in monetary policy is intended to target black-market currency trade and is one of many reforms announced during the first term of current Uzbek President Shavkat Mirziyoyev. (FT)

Paul McCarthy

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