Chairman of the Federal Reserve, Jerome Powell, gave a speech last Wednesday where he hinted that perhaps there would be fewer interest rate increases than the markets were expecting. This caused a massive rally in equities that removed bearish sentiment and gave stocks an impulsive advance that removed the weak technical outlook. However, the cherry on top is that the G-20 meeting this weekend was a success in that the U.S. and China will take a 90 day “time-out” to evaluate their trading relationship. That means no 25% tariffs on Chinese goods that would have started today. So, the stock market got what it needed for a Santa Claus rally for what is a seasonally strong part of the calendar.
The Fed has a meeting on December 19th where they are expected to raise rates one last time for 2018. Perhaps, the Fed will give us additional clarity on interest rates but I doubt they do anything to change their policy on the size of their balance sheet which is more important in my opinion given its size. If at any point we make new all-time highs this month, stocks will likely stay strong into the first quarter where we can re-visit the trading relationship between China and the United States.
Chart of the Week!
The US corporate bond market has entered a bear market after hitting a peak in February, warned Morgan Stanley. Analysts at the investment bank said 2017 proved to be the “Goldilocks” year for the credit market, as economic growth expectations brightened and investors looked forward to US tax cuts and a relatively accommodative Federal Reserve. But technical challenges began to appear in 2018 with the Fed “stepping harder on the brakes,” chasing more investors away from the US bond market. Market fundamentals are expected to worsen next year. Morgan Stanley’s analysts noted that monetary policy has turned hawkish and should near “restrictive territory” for the first time in this cycle. Also, tailwinds from a booming US economy are beginning to dissipate while earnings growth slows, they said.
Economic & Central Banking Snippets
- Japan Manufacturing PMI for November was 51.8 vs 52.9 in October – the lowest reading since 2016.
- The Dallas Manufacturing Index for November slowed to 17.6 from 29.4 and that was 7 pts less than expected. It’s also the weakest print since July 2017. Capital spending in particular is the slowest since April 2017.
- Business confidence in Germany slipped again in November as jitters over a slowing manufacturing sector persisted. The third consecutive monthly decrease came as German companies revised down their assessment of current and forward looking expectations.
- According to S&P Core Logic, the rate of home price increases across the U.S. slowed for the second month in a row. The strongest cities: San Francisco, Las Vegas and Seattle. Denver and Minneapolis had the biggest month-over-month declines.
- General Motors will stop production at seven plants next year as it seeks $6bn in cost savings to bolster the carmaker against a downturn in its home market and the impact of the global trade war. The company will cut about 15% of its salaried employees in North America and phase out several car models over the next year in an effort to get ahead of an expected cyclical downturn in the U.S. vehicle market. GM is shifting its focus to electric and hybrid vehicles, as well as sport-utility vehicles and trucks instead of sedans.
- In the clearest indication yet of just how severe the recent spike in Italian interest rates has been on the country’s financial institutions, Italy’s largest bank, UniCredit, surprised the market when it sold $3 billion in dollar denominated five-year bonds last week. To find a willing buyer, the bank had to pay the equivalent of 420 basis points (4.2%) over the euro swap rate, which is six times more than the 70 bps over swaps it paid on five-year euro senior non-preferred bonds just this past January. The spread on the new issue was a shock as it represented a nearly 150bps concession to current market rates, and is an indication of just how much even the strongest Italian banks have to pay up if they hope to access capital markets during the ongoing Italian political turmoil.(Boock Report)
- Bayer, the German pharmaceuticals and chemicals group, has announced plans to cut 12,000 out of 118,200 jobs worldwide in a bid to reduce costs and regain investor confidence following a string of legal setbacks related to the acquisition of Monsanto earlier this year.
- Netflix is in advanced talks to take a long lease at Pinewood Studios and make the home of films such as Star Wars and James Bond its UK production hub, underlining the streaming service’s increasing role as a force in global entertainment production.
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Paul J. McCarthy, III
President – Kisco Capital