A critical week as the Fed disappointed the markets on Wednesday while the White House brought the tariff hammer down upon China on Thursday. Let’s take a look at how the S&P 500 and the 10Yr Treasury bonds reacted.
Below is the S&P 500 Index and the big question is the depth of the correction that started this week. Are we correcting the June low or the December 2018 low? So far, the S&P 500 tapped the 38.2% retracement on Friday at 2,913 and closed this week below the 50 day – not great.
The 10Yr Treasury bond broke below 2% this week in a sign that something more serious may be brewing. The chart looks as though we may re-rest the 2016 low of 1.39%.
If you recall, earlier this year the yield curve inverted in a sign that a recession was on the horizon. Could the tariffs implemented by the White House tip the U.S. economy into contraction? Overseas, we are seeing a recession brewing in Europe while China/Japan/South Korea will all be impacted negatively by the tariffs as they now include consumer products like iPhones.
The Fed may have just drawn a line in the sand for the market. If Wednesday was the one and only cut this year and the tariffs cause a slowdown in corporate investment, a recession may be in its early stages. Let’s not forget that the yield curve has warned us of a slowdown coming so how the stock market behaves in the coming weeks will be very telling on the market’s outlook for prospective growth to close out 2019.
Chart of the Week!
Big brother is watching you! At least he is in London and Beijing. Facial recognition technology is becoming ubiquitous for some cities as governments use facial recognition to identify criminals and terrorists. However, China’s communistic government also uses this technology to rank the behavior of law-abiding citizens for their ‘social credit system’ that will be implemented by 2020.
Economic & Central Banking Snippets
- Fitch Ratings has soured on South Africa, citing concerns about the country’s spiraling debt levels and flagging growth potential – now rated BB+ Negative Outlook. “Fiscal metrics have deteriorated significantly due to underperformance of revenue, which is expected to worsen in the current fiscal year as growth has turned out to be weaker than expected,” Fitch said. (FT)
- Pending home sales in June jumped 2.8% m/o/m while growth was seen in all 4 regions, particularly out West with a 5.4% m/o/m increase. The overall index has improved to the best level since December 2017 but the y/o/y seasonally adjusted gain is still just 1.6% as the benefit of lower mortgage rates is not enough to offset the higher prices. (Boock)
- The Conference Board said Tuesday in a monthly report that its U.S. Consumer Confidence Index jumped to 135.7, up from 124.3 in June, to hit its highest level since November and retest an 18-year high of 137.9 set in October. (FT)
- Japan has cut its growth forecast for the year amid mounting expectations of a slowdown in export growth, as the fallout of the US-China trade war takes its toll in Asia. Japan’s economy grew 2.2% in the first quarter, compared to a year ago, thanks to improvements in capital spending. Japan’s recent restrictions on the export of materials critical to the manufacture of computer chips has also added to the uncertainty. (FT)
- A historically low unemployment rate should, in theory, push up wages as employers try to retain and attract workers. But wage growth is slowing down, not speeding up. In June, average hourly earnings were up 3.1% from a year earlier, down from 3.4% in February. (WSJ)
- The labor-force participation rate for people 25-to-54-years-old—prime-working age—climbed steadily from 2015 through 2018 but has stagnated for much of 2019. Strong job prospects could attract more prime-age people back into the workforce. (WSJ)
- US hiring continued to grow in July, but a sharp revision to job gains in the previous month took some gloss off an increase in average earnings and is likely to continue spurring debate over the outlook for interest rates through the rest of 2019. Non-farm payrolls rose by a net 164,000 in July, according to the Department of Labor, matching Wall Street’s median forecasts although slower than the downwardly revised 193,000 additions in June. The unemployment rate held steady at 3.7%, in line with expectations. (FT)
- President Trump moved to extend tariffs to almost all Chinese imports. The new round of levies would take effect September 1st and cover $300 billion in Chinese goods—on top of tariffs already imposed on $250 billion in imports from China. Unlike previous rounds of tariffs, which have focused largely on industrial goods, the $300 billion tranche is set to include a host of consumer products, including smartphones, apparel and toys. (WSJ)
- China’s car market shrinks which is hitting foreign manufacturers hard, with some operating at a fraction of potential output and preparing to follow Japan’s Suzuki, which last year became the first to quit the world’s biggest market in decades. (FT)
- United Airlines is taking an equity stake in Clear, a company using iris and fingerprint scans to get you through security. They currently operate at 31 airports and $UAL is going to help them get into more. Delta currently has a 7% stake in the biometrics security company. (Stocktwits)
- Apple said profit fell 13% as it continued to grapple with a slumping iPhone business and an economic slowdown in China. Revenue edged up 1% to $53.81 billion for the three months ended June 29, an improvement from revenue declines in the past two quarters. (WSJ)
- Samsung Electronics warned of growing uncertainties, particularly in its chip business, amid an escalating trade row between South Korea and Japan, but it still expected demand to pick up in the second half. The outlook came as the world’s largest producer of memory chips and smartphones reported weak earnings for the second quarter, hit by falling prices of microchips and display screens. (FT)
- Jeff Bezos has sold $1.8bn worth of Amazon shares over the past few days in his first stock sale since his divorce. The world’s richest person, according to Forbes, has lately cashed in about $1bn worth of Amazon stock a year to fund his rocket venture, Blue Origin. Following this week’s sales, his remaining Amazon stock holdings are worth around $109bn. (FT)
That is all for now until next week’s Market Update. Thank you for being a subscriber.
Paul J. McCarthy, III
President – Kisco Capital