The Fed Bunts…

We all got a big sniff of stimulus this week as the Fed didn’t move rates on Wednesday in their June meeting but let the market know interest rate cuts were likely later this year. Think of it as a halftime pep talk for the stock market – turn on those machines and get out there and buy ’em!

Stocks lifted nicely to new all-time highs on the S&P.

$SPX: S&P 500 Index

The dollar weakened and gold soared on the Fed news and is now breaking multi-year resistance.

Don’t forget bonds – they rallied, too! Yep, everything went higher after the Fed. The chart shows yields falling (prices higher) since last October.

$TNX 10YR US Treasury Constant Maturity Bond Yields

It was only a matter of time before the Fed made this move after raising rates last year. Until central banks in Asia and Europe follow the Fed in raising rates, the differentials in currencies (PPP) put our trading partners in a precarious position. You may not know this but many countries and foreign countries issue debt in US dollars despite transacting in their local currency. If the US dollar strengthens it makes it much harder to repay their dollar denominated debt as their local currency depreciates. It is almost as though the principal balance of their debt rises as their local currency depreciates.

When the Fed raises rates like last October, dollar assets like stocks get sold as US dollars are needed to fund debt obligations. It gets complicated but that is how or why money flows among countries. In other words, the Fed is the world’s central bank and can no longer act as an insular entity that manages only the U.S. economy. At this point in history, the Fed raising rates creates a negative feedback loop with our trading partners that can’t be avoided. At least they have tested the markets over the last year and now know the sensitivity of their policy changes on the equilibrium among the major economies.

The Fed will provide stimulus because they have to. The U.S. economy probably doesn’t need a shot of stimulus right now but our central bank needs to play ball and just advance the runner.

Chart of the Week!

Looks like the teens don’t need that fake ID anymore….

Economic & Central Banking Snippets 

  • Mario Draghi has given his clearest indication yet that the European Central Bank will launch another round of stimulus should the climate of weak growth and political uncertainty continue. The comments triggered a fall in the Euro while German government bond yields hit a record low. (FT)
  • The Japanese trade data confirmed again the slowdown in global trade in May. Exports fell 7.8% y/o/y, a bit better than the estimate of down 8.2% but imports dropped 1.5% vs the forecast of up 1%. Exports to China fell 9.7% y/o/y, were lower by 7.1% to Europe but rose 3.3% to the US. (Boock Report)
  • The Federal Reserve held interest rates steady but shifted towards a more dovish stance and pointed to possible interest rate cuts in the future, citing rising “uncertainties” about the economic outlook. The Fed said it would “act as appropriate to sustain the expansion” and would “closely monitor the implications of incoming information for the economic outlook”. This marked a change compared with previous language in which the Fed said it would simply be “patient” in determining changes to interest rate policy. (WSJ)
  • The Bank of England expects economic growth to drop to zero in the second quarter as it kept interest rates on hold at 0.75%. Unlike the European Central Bank and the Federal Reserve, which this week both signalled a willingness to consider lower interest rates, the bank’s Monetary Policy Committee continued with its previous guidance. The committee said that its consensus view was that further rate rises were likely to be required “at a gradual pace and to a limited extent”, adding that “underlying growth in the UK appears to have weakened slightly in the first half of the year relative to 2018 to a rate a little below its potential”.
  • Manufacturers in the US mid-Atlantic region this month reported a steep decline in activity to its lowest level in four months, adding to the recent batch of disappointing economic data that has fuelled expectations the Federal Reserve may cut interest rates this year. The headline general business activity index of the Philadelphia Federal Reserve’s manufacturing survey fell sharply to 0.3 in June from 16.6 the previous month, data on Thursday showed. (FT)
  • The Bank of Japan has shrugged off the US Federal Reserve’s shift to a dovish stance as it kept monetary policy on hold at its June meeting. By a majority vote of 7-2, the Japanese central bank kept interest rates at minus 0.1%, maintained its cap on ten-year bond yields at around zero and pledged to keep buying government bonds at a pace of ¥80tn ($743bn) a year. The decision exposes Japan’s central bank to the risk of a stronger yen as traders start to price in a narrowing gap between Japanese and US rates. Dovish Fed policy combined with the slowdown in China, induced by its trade war with the US, create mounting risks to the outlook for Japan. Weakness in exports has contributed to a slowing of Japan’s economy in 2019. (FT)

Macro Snippets

  • Deutsche Bank is preparing a deep overhaul of its trading operations including the creation of a so-called bad bank to hold assets valued by the German lender at up to €50bn, after adjusting for risk. (FT)
  • Ren Zhengfei, founder and president of Huawei, said on Monday its international smartphone sales fell 40% month-on-month in May as US pressure on the telecoms company mounted. He also shaved $20bn off Huawei’s 2019 revenue forecast, cutting it from $120bn to around $100bn. “We didn’t think that the US would attack Huawei with such great strategy and determination,” he said, but insisted: “these things can’t halt our onward march”. (FT)
  • Facebook has revealed plans for a new global digital currency called Libra with the backing of more than two dozen companies ranging from Visa and Mastercard to Lyft and Spotify, bringing the heft of the world’s largest social network to efforts to transform financial services. (FT)
  • Venezuelan leader Maduro is selling off his country’s gold reserves. Some of it has passed through a secretive operation in East Africa, a gambit that evades U.S. sanctions. On two early-March flights, at least 7.4 tons of gold with a market value over $300 million moved from Venezuela to a refinery in Uganda. The shipments expose one link in a global underground economy many suspect is helping Mr. Maduro cling to power by bypassing the U.S.-dominated international finance system. (WSJ)

Thanks for reading and hit me up at the email below if you ever want to talk about the markets.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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