The Fed in Retrograde

As central banks have back-pedaled on their tightening polices, stocks have continued higher in unabated fashion since December. We are now above a key support level (2,600) which should hold if stocks are to continue higher into the spring.

It is easy to recognize the correlation of the stock market to Fed policies which is a bit scary considering valuation metrics with risk assets. What are stocks and junk bonds worth AFTER the central banks raise interest rates and shrink their balance sheets? That could be an ugly picture for the weak links out there relying on debt to finance growth. Seems as though the December plunge in stocks and junk bonds caused the Fed to tap the brakes. One thing they can’t put back in the bottle is that a spotlight was shined on the weakening nature of credit in the bond markets. No doubt, the seeds of the next recession.

The next Fed meeting is coming up this week where we will be tantalized with another press release on Wednesday at 2pm where the Fed is expected to do nothing. Their forward guidance is more important and will likely be toned down as they need the markets to work-off their December hangover before re-engaging the quantitative tightening gears.

What else?

  1. Earnings season continues as 17% of the S&P 500 has reported with slightly better than expected earnings. Some sectors continue to do well like technology and airlines but not not autos, for example.
  2. The government shutdown ended this week. We will know in three weeks, for sure.
  3. China trade negotiations continue and they should get something done in 2019.

Chart of the Week!

France and Germany have signed an historic friendship treaty in Aachen. Amid Brexit, rising populism and Euroscepticism, both countries agreed to issue joint statements on key EU issues, deepen economic integration and enhance defensive cooperation. German Chancellor Angela Merkel said that the aim of the pact is a “German-French economic area with common rules” and “a common military culture” which could “contribute to the creation of a European army”. Some labeled the treaty symbolic and irrelevant while others accused both governments of signing away their national sovereignty.

Economic & Central Banking Snippets 

  • China’s economic growth slipped to 6.4% in Q4, the lowest growth rate since the global financial crisis. Chinese gross domestic product growth has slowed for three consecutive quarters, prompting concern among global investors that China could drag the global economy downward. (FT)
  • The International Monetary Fund cut global economic growth forecasts for 2019 and 2020, citing eurozone weakness, a possible no-deal Brexit, an escalation of trade tensions and the slowdown of China’s economy. The IMF placed growth at 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points, respectively, from October’s outlook. (SIFMA)
  • Governments are continuing to run up huge debt levels, with emerging countries helping push the total global IOU to 80% of global gross domestic product. The worldwide tab through 2018 is now up to $66 Trillion as measured in U.S. currency terms, about double where it was in 2007, according to Fitch Ratings’ new Global Government Debt Chart Book released Wednesday.
  • Japan’s January manufacturing PMI fell to exactly the flat line at 50 from 52.6 in November (meaning no growth). Markit said “The underlying picture will raise concern given renewed reductions were seen in new orders and output. Further signs that the downturn in the global trade cycle could yet worsen were also signalled, with new export orders falling at the sharpest rate since July 2016.”
  • The Eurozone manufacturing and services January PMI fell to 50.7 from 51.1 with both components falling m/o/m which is the slowest pace of growth in 5 1/2 years. According to Markit, this level of activity equates to GDP growth of just 0.1% q/o/q.  (BOOCK Report)
  • Germany’s manufacturing sector slipped into contraction in January. “Manufacturing fell into contraction in January as the sector’s order book situation continued to worsen, showing the steepest decline in incoming new work since 2012,” said Phil Smith, principal economist at IHS. (FT)
  • China added gold to its foreign reserves in December for the first time in two years in a sign that points to reducing dependence on the dollar. China’s Treasury holdings also dropped for the fifth straight month as they may be substituting gold for the U.S. bonds. (Seeking Alpha)

Macro Snippets

  • Brussels has fined Mastercard €570m for limiting banks’ ability to shop around between member states to offer lower fees, restricting competition between banks and raising the cost of card payments for both retailers and customers. (FT)
  • J.C. Penney Co.’s sales are falling and its turnaround strategy keeps changing. The series of events is prompting analysts and other industry experts to question whether Penney can avoid the fate of Sears Holdings Corp., which filed for bankruptcy and barely staved off liquidation. (WSJ)
  • Germany’s Kion Group AG plans to expand a South Carolina factory to escape a 25% tariff the U.S. levied on forklifts imported from China. Foreign companies—from auto makers to solar panel manufacturers—have sketched out plans to expand their U.S. manufacturing footprints in response to trade tensions between the U.S. and China. (WSJ)
  • China financed more than a quarter of all coal plants announced outside the country last year according to a new report, putting its clean energy image at risk as Chinese institutions fund coal-fired projects in emerging markets. Chinese institutions last year provided $36bn of financing for coal plants outside the country according to a report published by the Institute for Energy Economics and Financial Analysis (IEEFA), a US-based non-profit. (FT)
  • Defaults on Chinese corporate bonds rose to a record high last year growth slows in the country. Forty five Chinese corporates defaulted on 117 bonds with a principal amount of Rmb110.5bn ($16.3bn), according to Fitch statistics that track the credit market on mainland China. Both the number of issuers and principal value were all-time peaks. “The vast majority of onshore defaults were by non-[state-owned enterprises], which accounted for 86.7% of defaults by issuer count and 90% by principal amount,” said analysts at Fitch. 
  • Facebook is planning to link the messaging services of WhatsApp, Instagram and Facebook Messenger into one encrypted system, in the first major push to integrate the services. The company wants to incorporate end-to-end encryption into all of the messaging services, meaning only people sending and receiving messages are able to view them.

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

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Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.