The Fed governors were out and about this week making speeches and back pedaling their December attempt to spit in the face of a collapsing stock market by raising interest rates. In other words, the Fed has blinked and there is no better evidence than the minutes from their December meeting that were released on Wednesday. Now, the “minutes” are NOT a transcript and are used to convey a narrative that the Fed uses to sooth market participants and talk down market volatility when they make a regrettable action. The Fed’s campaign message of patience was loud and clear this week as the Fed can’t maintain credibility if it turns the stock market into a singularity of wealth destruction.
The Fed has imbedded itself into the circuitry of of the stock market for many years and I don’t envy the position of the Fed’s leadership. The incredibly difficult job of taking the punch bowl away while keeping the party going is an impossible task. For the mean time, they may have bought themselves some time and now we are on to earnings season which kicks off next week.
The stock market is up over 10% from the lows and now we have stopped at a key resistance level in the chart below:
There is potential for positive catalysts on the horizon with the government shutdown ending, trade talks with China resolving and with low expectations around earnings (easy hurdle to jump over). However, as the chart shows we are at a critical juncture where the market’s expectation of the Fed’s polarity will influence the next move. The next Fed meeting is January 30th, by the way.
Chart of the Week!
Below is a graphical representation of GDP by county.
Economic & Central Banking Snippets
- The December ISM services index fell 3.1 pts m/o/m to 57.6 which is the lowest since July. The ISM’s bottom line was this: “The non-manufacturing sector’s growth rate cooled off in December. Respondents indicate that there still is concern about tariffs, despite the hold on increases by the US and China…Respondents are mostly optimistic about overall business conditions.”
- From December 2017 to December 2018, payroll employment rose by 2.6 million (1.8 percent), compared with a gain of 2.2 million for the previous 12 months.
- The December Eurozone economic confidence index fell to 107.3 from 109.5. That’s 1 pt below expectations and is at the weakest level since December 2016.
- German industrial production fell by 1.9% in November, the third straight month of decline despite predictions that it would increase by 0.3 per cent. (FT)
- French consumer confidence has been tumbling for most of 2018.
- Federal Reserve Chairman Jay Powell said the central bank will press ahead with its plans to significantly reduce its balance sheet, in comments that suggest there may be more monetary tightening ahead. “It will be substantially smaller than it is now,” he said during a discussion at the Economic Club of Washington, DC. The pace that the Fed will shrink its vast holdings of Treasuries and mortgage-backed securities has been of particular interest to investors. While the bank’s buying of these assets in the wake of the 2008 global financial crisis has encouraged investors to buy stocks and corporate debt, the fear in the market is that prices for these riskier assets will now come under pressure as the Fed begins to reduce the size of its balance sheet. (FT)
- SoftBank is scrapping its plan to buy most of WeWork. The program to invest $16 billion in the shared-office space provider is now being reduced to a smaller deal of about $2 billion amid market turbulence and opposition from investment partners, according to people familiar with the matter. (WSJ)
- Venture capital activity in the United States reached its highest level since the dot-com era and Y2K.
- Deaths from cancer dropped 27% over a quarter century, resulting in an estimated 2.6 million fewer cancer deaths during that period, according to a new report from researchers at the American Cancer Society. For most of the 20th century, overall cancer deaths rose, driven mainly by men dying from lung cancer, researchers noted. But since the peak in 1991, the death rate has steadily dropped 1.5% a year through 2016, primarily because of long-running efforts to reduce smoking as well as advances in detection and treatment of cancer at earlier stages, when prognosis for recovery is generally better. (WSJ)
- In the latest confirmation that global auto sales are sliding, Ford has announced a massive ‘restructuring’ of its European operations. The move follows in the footsteps of GM’s much broader restructuring, that will entail thousands of job cuts and possibly factory closures. The cuts are hardly a surprise after the carmaker’s foreign profits have plunged over the past two years thanks in part to exchange rate-related losses spurred by the strength of the dollar, as well as poor sales of its diesel models.
- General Motors CEO Mary Barra said the automaker’s full-year 2018 earnings exceeded its previous expectations and 2019 is looking even better, citing strong sales in China and high demand for its truck and utility vehicles in the U.S. (CNBC)
- Moody’s Investors Service on Thursday became the second rating agency to push PG&E’s credit rating to junk status amid concerns over wildfire-related costs, sending shares of the California power utility sharply lower. Moody’s lowered its rating for PG&E to B2 from the investment grade level of Baa3, saying potential liabilities have grown and liquidity reserves have declined. PG&E subsidiary Pacific Gas & Electric also received a rating cut to Ba3 from Baa2. “The company is increasingly reliant on extraordinary intervention by legislators and regulators, which may not occur soon enough or be of sufficient magnitude to address these adverse developments,” Moody’s vice-president and senior credit officer Jeff Cassella said.
- Saudi Arabia is now planning its long-delayed Aramco IPO for 2021 after undertaking a series of moves that may give more transparency to potential investors. The kingdom has released the results of an independent audit that confirmed it controls more than 260B barrels in oil reserves and announced that Aramco will issue bonds next quarter. In order to tap the debt market, the oil giant will need to release additional financial information. (Seeking Alpha)
- What’s going on with the shuttered stores that were previously home to Sears, Kmart and other struggling retailers? Amazon-owned Whole Foods is eyeing the sites, sources told Yahoo Finance. While Whole Foods currently has more than 470 stores around the country, it is still a far cry from its competitors in the grocery space, including Walmart and Kroger.
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