The stock market has continued to oscillate this year round the same price from December 31st, 2017. I have highlighted this price in the chart below with a magenta line:

We bounced off this level in late June and are now back to resistance at the March and mid-June highs where the market will again test these levels. There is a chance that the market melts-up into options expiration on Friday (usually bullish), however, the rise this past week was on thinning volume which implies there is less conviction to buy stocks at these prices. Also, long-term Treasury bond yields continued to edge lower as stocks have rallied which is not what we should be seeing if GDP prospects will continue to be healthy over the next 6-12 months.
The spread between 2YR and 10YR Treasuries continued to tighten 5bps to 25bps this week. The chart below should give you perspective on how bond market traders view this relationship:

We tightened from 30 to 25bps this week so the odds rose from 1% to 10%. I just want to emphasize this spread rarely tightens to these levels so it is worth paying attention to in the coming weeks. I would also like to add that the 2YR Treasury bond yield hit 2.6% this week which was a 10 year high. The trend higher is undeniable. The inflation data reported below should keep the Fed pushing interest rates higher in the coming year.
Chart of the Week!

Economic & Central Banking Snippets
- ECB governing council Ewald Nowotny has warned there could be an accidental currency war if a global trade battle escalates further. Mr Nowotny, who is also the governor of the Austrian central bank, said in a press conference reported by Reuters that while the risks of a trade war were less dramatic than they at first appeared, there could also be an unintended currency war. A currency stand-off would have a more serious effect than a trade spat, he said. (Reuters)
- There was a slew of economic data misses out of Europe this week. Industrial production out of France, Italy and the UK for May all missed the estimates with outright declines in the UK and France m/o/m. Also, the German ZEW economic expectations index fell to -24.7 from -16.1 which is the 4th month in a row below zero while this index lingers at its weakest level since August 2012. In particular, fears over an escalation of the international trade war with the US have dampened the economic outlook. The positive news regarding industrial production, incoming orders and the labor market have been greatly overshadowed by the anticipated negative effects on foreign trade. (Boock Report)
- U.S. consumer prices rose for a third straight month in June, eating away at sluggish wage growth and sending inflation to its highest rate in more than six years. The all items index rose 2.9 percent for the 12 months ending June; this was the largest 12-month increase since the period ending February 2012.
- The Producer Price Index (PPI) for final demand rose 0.3% in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported this week. On an unadjusted basis, the final demand index moved up 3.4% for the 12 months ended in June, the largest 12-month increase since November 2011. This shows that inflation is building in the pipeline for goods and services.
- Canada raised its benchmark interest rate for the first time in six months on Wednesday as a steady uptick in inflation and a run of strong economic readings gave policymakers room to resume monetary tightening. The Bank of Canada lifted the main interest rate by a quarter of a percentage point to 1.50% – the highest since December 2008.
Macro Snippets
- A country that shuts out imports deprives its trading partners of money to buy exports. If the U.S., for any reason, cuts its imports from a trading partner, that country’s economy and currency both weaken, so it buys less from U.S. companies. (WSJ)
- Dump tech, buy defensive. That’s the message from analysts at Morgan Stanley on Monday. The bank is bracing for a turn lower in the stock market and is recommending clients to shift away from the technology stocks that have helped drive US equities higher and move into more defensive sectors such as consumer staples, telecoms and utilities. In a note on Monday they said they expect earnings growth to peak and benchmark 10-year Treasury yields to move lower, resulting in an eventual inversion of the so-called yield curve where short-dated interest rates climb above longer-dated interest rates.
- Tesla’s CEO Elon Musk signed an agreement in Shanghai on Tuesday to open his next factory. Tesla’s “Gigafactory 3” will be the company’s first in China. It will produce lithium-ion batteries as well as Tesla cars.
- Securities regulators are investigating whether Facebook adequately warned investors that developers and other third parties may have obtained users’ data without their permission or in violation of Facebook’s policies, people familiar with the matter said. (WSJ)
- Wells Fargo’s revenues and profits declined in the second quarter, the latest sign it is struggling to restore its reputation as a reliable financial performer almost two years after a scandal over fake accounts erupted at the US bank. The country’s third largest bank by market capitalisation has been grappling for months with a succession of compliance problems. This year the Fed hit it with unprecedented sanctions over customer mistreatment, preventing it from expanding its $2T balance sheet. (FT)
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.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital
(347) 709-9539