A good close on Friday for the stock market after a tester on Tuesday that was caused by a dramatic rise in Italian interest rates.
The rise was caused by a change in the leadership of the Italian government where the new leadership is skeptical of continued participation in the Euro zone experiment that has evolved into a nanny state. Why so skeptical? High unemployment and a sluggish economy stuck under a Euro where Germany is the biggest beneficiary. There are talks of leaving the Euro but for now the new Italian government may prefer to issue a parallel currency called the ‘mini-BOT’ used to pay off individuals and companies who are owed money by the state as payment for services or as tax rebates. It is not a done deal but if issued it would be one foot out the door towards exiting the EURO currency. Elections have consequences and they may be the most significant in Europe but there are others coming up, here are a few:
Turkey: June 21
Mexico: July 1
Brazil: October
US: November
We will be back to Italy and the Euro zone in the future. For now, the local Italian banks and the ECB bought up all those higher yielding Italian bonds after Tuesday so the crisis is “over” while the politicians in Brussels groom their next Manchurian Candidate to lead the ECB.
The US stock market was good this week and I think we are about to move higher in the broader indices led by the NASDAQ whose sub-sectors were among the strongest on Tuesday’s sell-off. Let’s take a look at how we ended up:
The S&P 500 is trying to make a break higher which is likely in the next 1-2 weeks. Here is the chart:
A triangle is a continuation pattern which means that the uptrend from the 2009 low is likely to continue in the coming months. This may be the last leg of the bull market but it may present some very good investing opportunities in some of the stronger sectors such as technology. How long will it last – much tougher to use technical analysis to predict that but it should last several months. Just a few more sessions and the S&P 500 should get moving towards new all-time highs. Ciao to the correction of 2018!
Chart of the Week!
Economic & Central Banking Snippets
- Rural communities in the U.S. are facing an acute shortage of affordable housing, making it more difficult to attract workers in already tight labor markets. In some areas, companies aren’t expanding because there aren’t enough workers, and workers are passing on jobs because there aren’t enough places to live. State governments are stepping into the void: Nebraska recently granted $7 million to rural communities to build market-rate homes to help attract more workers. (WSJ)
- Home-price gains showed no signs of slowing in March. The S&P CoreLogic Case-Shiller 20-city index gained 6.8%, unchanged from the previous month. Average home prices in the 20-city index are now 1% above their previous peak. Of course, not all cities are back to bubble-era highs and the composite doesn’t account for inflation. But, alongside rising mortgage rates, home buyers in many parts of the U.S. are surely feeling an affordability squeeze. (WSJ)
- The EU unemployment rate in April did hold at 8.5%. The forecast was for a one tenth drop but it still is the lowest level since December 2008. (Boock Report).
- While trade policy is grabbing headlines, the U.S. economy appears to be chugging along just fine. Americans’ spending gathered further momentum in April as incomes continued to rise, a sign consumers could drive stronger economic growth in the second quarter. Personal-consumption expenditures (PCE), a measure of household spending on everything from health care to magazines, posted its largest increase in five months, Harriet Torry reports. The spending data “help the case for a pickup” in economic growth in the second quarter after a modest slowing in the first, said High Frequency Economics’s Jim O’Sullivan. (WSJ)
- India’s economy continued its recovery in the first three months of 2018, growing at an annualised rate of 7.7%, according to figures published on Thursday. The revival in the last quarter underlines India’s position as one of the world’s fastest growing major economies, and was largely driven by a jump in government spending. (FT)
- Payrolls expanded by 223k in May, 33k more than expected and the two prior months were up a revised 15k. The unemployment rate fell to 3.8% as the household survey showed a job gain of 293k at the same time the size of the labor market rose just 12k. The more comprehensive U6 unemployment rate is now down to 7.6% which is the lowest since May 2001. Rising wages were evident as average hourly earnings 2.7% y-o-y. Average weekly earnings is near the best in 7 years. (Boock Report)
- The Institute for Supply Management’s manufacturing gauge rose to 58.7 last month, an increased of 1.4% from the previous month and exceeding economists’ estimates for a rise to 58.1. Readings above 50 signal that the industry is expanding. The details of the manufacturing report were healthy with new orders, production and employment sub-indices also picking up last month. New export orders however registered a decline led by the apparel and leather industries and primary metals sector. “Five of six big industry sectors continued to expand export activity during the period, in spite of comments noting the strength of the US Dollar,” Timothy Fiore, chair of ISM, said. (WSJ)
- A separate report showed US construction spending grew 1.8% m-o-m in April, exceeding estimates. That was the biggest increase since January 2016. Total private construction grew 2.8%, with spending on residential buildings rising 4.5%. The data showed the labor market remains strong with hiring ramping up in May, unemployment falling to a fresh 18-year low and a faster than expected rise in wages. Overall Friday’s reports paint a healthy picture of the US economy and are likely to keep the Federal Reserve on track to lift interest rates when it meets in June.
Macro Snippets
- The U.S. operation of Germany’s troubled lender has been put on the FDIC’s list of “problem banks,” according to the FT. The FDIC isn’t commenting, citing policy not to publicly identify banks on that list. For its part, Deutsche Bank tells the FT it’s very well capitalized.
- Moody’s on Thursday raised its outlook for the US steel industry after the Trump administration said it would start imposing tariff on steel and aluminum imports on Friday. The credit rating agency raised the 12 to18-month outlook for the sector to “positive” from “stable” on improved demand, shortly after the US announced said it would proceed with tariffs on imports from EU, Canada, and Mexico.
- Moody’s has said it will consider whether to further downgrade Turkey, just a few months after it lowered its rating on the country by one notch due to rising economic uncertainty under the leadership of President Recep Tayyip Erdogan. The agency said that Turkey’s Ba2 ratings could be at risk due to a lack of clarity about what direction economic policy will take, given its external vulnerabilities, “that will, if sustained, raise the risk of severe pressures on Turkey’s balance of payments to a level that is no longer consistent with the current rating.”
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Regards,
Paul J. McCarthy, III
President – Kisco Capital
