I like to talk about macro risk as I think currencies, central bank policies and interest rates are the three legs of the risk stool that matter as central banks attempt to unwind their ultra-loose monetary policy instituted over the last decade. The “great unwind” is happening slowly but not without tremors like we saw from the Turkish Lira this week that became severly devalued . Why does Turkey matter? Aside from being a trillion dollar economy that bridges the middle east and Europe, it is now a source of volatility that acts as a ripple in the currency pond. Now that we see inflation rising in many countries, central bank polices over the next 1-2 years will likely converge to combat inflationary pressures through interest rate increases.
Turkey is a test case. It is a large economy but not so large that it creates the next financial crisis. You could say Turkey’s problems are due to a rising dictator or you could view it as a country that refuses to bring interest rates to reality. By not raising rates, their currency becomes severely devalued which leads to a lack of faith in the Turkish economy and the Lira. If you have studied economic history you will know that this story has played out many times before which means that Turkish citizens will likely be robbed of their wealth (unless they own hard assets like gold or real estate).
And herein lies the conundrum for central banks. Inflation shows no quarter. Just ask the citizens of Venezuela who have suffered through hyper-inflation and have nothing now. Our central bankers know this conundrum quite well which is why I try and emphasize watching inflation measures as a foreshadowing of interest rate decisions by central banks. The central bankers are watching situations like Turkey as a test case for what could happen if inflation measures accelerate as there will be no choice but to keep raising interest rates for the foreseeable future.
For equities, we saw a hiccup on Friday in reaction to the Turkish Lira crashing but you probably knew that the S&P 500 was already bumping up against resistance as you can see in the chart below. For now, the S&P 500 is leaning towards new highs so we will see next week if Friday’s weak action carries into Monday.
Chart of the Week!
Below is a chart of the holdings of the Swiss National Bank – Switzerland’s version of the Federal Reserve. Yup, central banks own dollar denominated U.S. equities. They aren’t the only central bank to own U.S. stocks, by the way. So, when do they sell?
Economic & Central Banking Snippets
- US producer prices (PPI) stalled for the first time this year in July, the Labor Department said on Thursday, even as so-called core PPI marched higher. The core producer prices strip out more volatile items like food and energy was up 2.8% from a year ago.
- Core consumer prices (CPI) in the US rose by their quickest pace in a decade in July and topped market forecasts, keeping the Federal Reserve on track to raise interest rates two more times this year. The data continue to paint a robust picture of the US economy, which grew at an annual rate of 4.1% the second quarter. Over the last 12 months, the all items index rose 2.9% before seasonal adjustment.
- The UK economy grew 1.3% in Q2 which is the 10th quarter in a row with a 1 handle. Manufacturing had the slowest quarter since 2012 but was offset by services and construction. Consumer spending and business investment rose, too. (Boock Report)
- The Philippine economy grew less than expected in Q2 as GDP rose 6% (Q1 was 6.6%). Rising inflation has undercut growth in the which mean the Philippines’ central bank is likely to hike its policy rate at its meeting later on Thursday, Capital Economics analysts said ahead of the data release.
- The Chinese YUAN‘s recent decline is a serious concern for global finance for two significant reasons: 1. The drop in the yuan’s value raises costs for Chinese companies who have DOLLAR payments to make; and 2. If the YUAN decline is orchestrated by the Xi regime to combat the Trump tariffs then the global economy may be subject to SYSTEMIC DISINFLATION as China uses a weak currency to dump its excess capacity onto to non-tariff-burdened markets. The YUAN has weakened against many currencies so Chinese goods in search of alternative markets from the U.S. will squeeze prices and profits on a global basis resulting in a diminished capacity for many emerging market corporations to service debt. (Boock Report)
- Investor appetite for US Treasuries showed no sign of waning at Wednesday’s record-setting auction of 10-year notes. Treasury traders were concerned that the largest debt sale ever at $26B would have a tough time moving the bonds. However, primary dealers, responsible for bidding on a pro-rata share of each auction, walked away with just 27.5% of the 10-year notes, down from a recent average of 29.8%, as other investors came in to buy. In other words, Treasury bonds are well bid on the long end.
- Fitch on Friday upgraded Greece’s long-term foreign currency rating by two notches to BB- from B with a stable outlook, citing improving public finances and relations with European creditors. Analysts noted that with the final review of the Greece’s European Stability Mechanism (ESM) programme completed, the path has been cleared for a successful exit from the ESM programme later this month.
- Puerto Rico has reached an agreement with creditors to restructure bonds backed by a portion of its sales tax known as Cofinas, solidifying a planned restructuring of roughly $18B in debt. The agreement, which requires court approval, would mark the biggest consensual debt settlement negotiated with creditors since the island entered a court-supervised bankruptcy last year. (Seeking Alpha)
- The SEC is making inquiries into the recent tweets of Elon Musk, which announced plans to take Tesla private for $420 per share this week. Several securities attorneys told Reuters that Musk could face investor lawsuits if it was proven he didn’t have secure financing at the time of his tweet, and could be in hot water if the statement was aimed at goosing his company’s share price.
- Accused of conducting improper fuel economy and emissions tests, Mazda and Suzuki Motor are the latest automakers to join the emissions cheaters club, according to Nikkei. The findings were the results of internal investigations ordered at Japanese automakers by the nation’s transport ministry after improper testing at Subaru and Nissan.
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.
Paul J. McCarthy, III
President – Kisco Capital