There is a lot to cover this week. If you have been reading my previous posts, I have been tracking 2,818 on the S&P 500 as a major resistance point for a corrective move to begin. After testing this level twice, a corrective move began on Monday and carried through Friday.

I expect this corrective move to last through March but next week is OPEX (Options EXpiration on Friday) which typically gives a lift to equity markets. So, expect a short-term rally of some kind before a more impulsive move to the downside begins (maybe after next week). Strong support should be found around 2,600 in the chart which I think is tested later this month.

The bond market is also sending some signals of its own as we are seeing an inversion in the belly of the curve as you can see below. The column on the right are yields for the corresponding bond maturities. 5YR Treasuries are yielding lower than 6 month t-bills! A sure sign of a late cycle situation. No red flag just yet but this is something to watch in the coming months.

Now, let’s take a look at the index for 10YR Treasury yields over the last several years, below.

As you can see, the 2.63% is a key technical level to hold in the chart. If we find ourselves with 10YR yields significantly below this level, then something larger is lurking for the US economy.

Late cycle warnings are emerging and there is no more glaring signal then the ECB’s policy decision this week. After an attempt at removing stimulus measures late in 2018, Europe’s central bank reversed course on Thursday (more below) and flipped to providing stimulus measures for the Euro zone. No doubt, the global macro picture is starting to wobble.

In the coming weeks/months, I expect we will find a bottom near 2,600 and then one more run at new all-time highs later this year. I think a good bet is that the Fed will follow the ECB if the S&P gets ugly enough in the coming weeks (they did blink in December). Also, any kind of deal with China would spark another round of enthusiasm towards buying US stocks as Japan and Europe are showing little to no growth.

Chart of the Week!

Economic & Central Banking Snippets 

  • The strong run of uninterrupted jobs for the United States came to a near halt in February, but wage growth held steady, offering evidence that the labor market remains resilient even as the wider economy is showing signs of slowdown. Non-farm payrolls missed estimates of +180,000 greatly as the actual number was a disappointing +20,000 according to the Labor Department. The figure is sharply lower than the blockbuster 304,000 jobs added in January. The bright note was that wage growth rose +3.4% (YOY) which was the highest rate of growth since April 2009. Employment in professional and business services, health care, and wholesale trade continued to trend up, while construction employment decreased. Also, the unemployment dipped to 3.8%. (FT)
Construction jobs may were likely affected by weather (snow) – not unusual.
Hey, better than the last cycle! Wonder where we would be without the Fed……
  • The labor force participation rate held at 63.2% in February and has changed little over the year. The employment-population ratio, at 60.7%, was unchanged over the month but was up by 0.3% (YOY).  (BLS)
  • Japan’s industrial production fell at its fastest pace in a year in January as the motor vehicle and electronics sectors posted declines while retail sales growth missed estimates. Marcel Thielant, senior Japan economist with Capital Economics, said the figures suggest the country’s economy may have contracted in the first quarter. “All told, it seems that the economy slowed sharply at the start of 2019, which should rattle policymakers at the Bank of Japan and should trigger a renewed debate about possible easing measures,” he said.
  • The European Central Bank signaled a major policy reversal, flagging plans for fresh measures to stimulate the eurozone’s faltering economy less than three months after phasing out a $2.9 trillion bond-buying program, making it the first rich-country central bank to ease policy in response to a global slowdown. ECB President Mario Draghi said the euro-zone economy will now expand only 1.1% this year, a drop of 0.6% from the forecast given just three months ago. Draghi told journalists in Frankfurt, “The risks surrounding the euro area growth outlook are still tilted to the downside.” (FT)
  • German factory orders unexpectedly fell in January, adding to the evidence that Europe’s largest economy is continuing to lose momentum. Orders were down 2.6%, the most since June, defying expectations for a 0.5% gain. The Bundesbank’s latest assessment is that Germany is seeing a dent in momentum and that growth this year will be below potential (the economy barely avoided a recession at the end of 2018). (Seeking Alpha)
  • The U.S. trade deficit in goods hit a record in 2018. The causes: More imports were pulled in by strong demand at home and some exports got hammered by retaliation against U.S. trade policies. “The fact that the U.S. economy is doing very well is the main reason the trade gap has risen,” said Harvard University’s Kenneth Rogoff. “Policies that play around at the margins with tariffs are always going to get swamped by macroeconomic factors.” And the picture looked less dire when services such as tourism, higher education and banking are counted. Including services, the trade gap grew 12% last year to $621 billion, the widest since 2008. (WSJ)
  • The goods deficit widened most last year with China, the U.S.’s largest commercial partner and the main focus of White House trade efforts. Beijing slammed the brakes on purchases of key U.S. exports, especially agricultural products such as soybeans, wheat and sorghum. China’s purchases of those three crops dropped by nearly $10 billion last year. (WSJ)

Macro Snippets

  • The debate over dual-class share structures — in which founders and sometimes early investors are issued stock with extra voting rights — has been revived following reports that Lyft, the ride-hailing company, is preparing to create “super-voting” shares for its co-founders, as it plans to list on the Nasdaq as soon as next month.
  • General Motors is expected to end production on the Chevrolet Cruze at its assembly plant in Ohio. The plant is one of five in North America being closed by GM in an adjustment to softer demand for passenger cars. (Seeking Alpha)
  • General Electric‘s CEO, Larry Culp, said that the company expects to see negative cash flow in 2019 from its industrial business, mainly due to ongoing weakness in its power unit. (Seeking Alpha)
  • According to internal company documents reviewed by Reuters, Philip Morris has for years paid production costs to Indian partner Godfrey Phillips to make its Marlboro cigarettes, circumventing a nine-year-old government ban on foreign direct investment (FDI) in the industry. (Seeking Alpha)
  • Norway’s $1T oil fund should sell out of oil and gas shares, the country’s government has recommended, in a move that will send shock waves through the energy sector. The world’s largest sovereign wealth fund, which owns about $37B in energy shares, should sell out of companies that solely explore and produce oil and gas in a bid to reduce the risk to the Norwegian economy of a sustained fall in oil prices, according to the country’s finance minister.
  • The ECB’s decision on Thursday to renew a crisis-era stimulus program prompted Eurozone banks to stock up on government bonds, reviving fears a debt “doom loop”. Martin Sandbu deems the ECB’s dovish turn “sensible” but revealed the economy, once again, to have been weaker than central banks’ expectations. (FT)
  • Elon Musk’s SpaceX is on the verge of allowing Nasa to launch human space flights from US soil after a gap of almost a decade. NASA has been working with SpaceX and Boeing on the development of new space capsules. If the mission is greenlit by the US space agency, it could see two US astronauts conduct the first human space flight from American soil since the Space Shuttle was retired in 2011. (FT)
  • Germany’s three big carmakers are facing heavy fines. BMW, Volkswagon and Daimler could face up to $50 billion in fines as the European Commission investigates whether they conspired as a “cartel” to cover up their cheating on diesel emissions. (StockTwits)

That is all for now until next week’s Market Update. If you would like a copy of the firm’s brochure, you can contact me directly at the email below. Thanks for reading!  


Paul J. McCarthy, III

President – Kisco Capital


Paul McCarthy

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