In the Chart: The December low was marked by a shift in Fed policy which caused a straight shot higher with few pullbacks until a wedge pattern formed in April that gave way to a month long correction in May. The May correction (labeled A-B-C) almost touched the 38.2% retracement level on Monday which coincided with the Fed’s James Bullard commenting that accommodative policy would be appropriate if the trade war with China persisted. Several other Fed governors fell in line with these comments as the two week quiet period the Fed observes before all its meetings started on Wednesday (their next release is on June 19th).
No doubt, the Fed got worried this correction would accelerate if the jobs numbers were weak on Friday – and they were (details below). The Fed has given the market a catalyst for higher prices which we have seen many times over the last 10 years. Good chance that Monday’s reversal continues and makes new all-time highs in the coming weeks. All eyes are now on the Fed’s June 19th meeting with hopes of an accommodative stance and signs of a rate cut.
Sounds like good news for the market but a longer-term perspective would bring to light that rate cuts mark the end of a business cycle. There is a lot of credit risk built into the system and the bond market is worried as US Treasury bond yields kept dropping this week despite the stock market reversal. The yield curve remains inverted which screams a slowdown is coming, too. Anything could happen now. The rate cuts in 2007 marked a top in the stock market but the 1998 rate cuts sparked a blow-off top where the NASDAQ doubled in 1999 and then topped in March of 2000.
Chart of the Week!
Lithium is one of the most important raw materials used in battery technology. It will become even more important once the e-mobility revolution continues in the coming years.
Economic & Central Banking Snippets
- The US economy added just 75,000 jobs in May, slowing sharply from a month earlier, intensifying the debate over whether the Federal Reserve needs to lower interest rates to sustain a decade-long expansion and counter drag from America’s trade conflicts. Employment gains in March and April combined were revised lower, meaning 75,000 fewer jobs were added than previously reported, while year-on-year wage growth was marginally slower than anticipated. The unemployment rate held steady at 3.6%, matching its lowest level since 1969. Top Federal Reserve officials including Jay Powell, chairman, have suggested they are willing to cut interest rates if the global outlook darkens sufficiently. Analysts said the new jobs figures heighten the possibility of a cut this summer.
- The US trade deficit narrowed in April as both exports and imports dropped. The Department of Commerce said Thursday the gap between US imports and exports fell to $50.8B, in line with expectations. Exports fell 2.2% which is the biggest month-on-month drop since January 2016 — amid lower demand for aircraft, cars and consumer goods.
- Growth in the US services sector picked up in May, bouncing back from a 20-month low and adding to the recent run of mixed economic readings on the world’s biggest economy. The Institute for Supply Management’s non-manufacturing gauge came in at 56.9 last month, up from the 55.5 recorded in April and topping expectations for a slight dip to 55.4. (FT)
- The May ISM manufacturing index fell to 52.1 from 52.8 and that was 1 pt less than expected. It’s also the lowest since October 2016, right before the election.
- Japanese manufacturing activity swung back into contraction in May, a private survey confirmed on Monday, as exports from the world’s third-largest economy continued their slump amid global trade tensions. “Weak demand from Japan’s key trade partner, China, as well as signs of an increasingly sluggish domestic economy, have impacted sales volumes,” said Joe Hayes, economist at IHS Markit. (FT)
- South Korea’s economy shrank more than previously estimated in the first three months of 2019, according to revised official figures, dragged down by slowing global demand for electronics. The country’s gross domestic product decreased by 0.4% in the first quarter compared to the previous period, according to the Bank of Korea. A 3.3% drop in manufacturing thanks to lower production of electronics contributed to the overall fall. South Korea’s high-tech industry has been hit by slowing global demand for semiconductors and uncertainty sparked by the US-China trade war. Exports from the country fell 3.2 per cent, led by a drop in shipments of LCDs and semiconductors, the central bank said. (FT)
One more thing….
The chart below shows how much debt is trading at negative yields which began as a trend in 2014. As you can see there is another leg up happening now that started in late 2018 – right when the S&P 500 bottomed. It is also when the Fed signaled an end to their rate hiking cycle which was taken as a sign of weakness as the bond market bid up prices right into negative yield territory. Most of this debt is found in Europe and Japan but the chart below is a longer-term warning sign that credit risk is rising and that the next recession will be felt around the globe. It doesn’t tell you when it will happen, however. Just know that rising stock market prices don’t tell the whole story about the health of all markets. At some point, they will all converge.
That is all for now until next week’s Market Update. Thanks for reading and don’t hesitate to reach out if you have any questions.
Paul J. McCarthy, III
President – Kisco Capital