Summertime Blues

A lot of news happened this week in the macro markets from Argentina’s peso crashing to protests in Hong Kong while additional signals flashed that trade tensions are impeding global growth. More economists are also coming to the opinion that the Fed’s attempt to raise interest rates last year had a much bigger effect than intended and that the reverberations are just being observed now (Fed policy works on a lag). The chart below illustrates what the “true” Fed funds rate was if you included the size of the Fed’s $4T balance sheet which equated to a negative interest rate:

If you factor in the reduction to the Fed’s balance sheet PLUS the rate increases then it was the equivalent of raising interest rates by 5.75%! Keep in mind that the Fed has never had a balance sheet this big so it is using trial and error to navigate policy decisions as all of this is unprecedented. These changes also take time to work through the macro markets so it is no surprise that there is a slowdown around the globe many months later.

Below is the chart of an index of 10Yr Treasury yields. The 10Yr yield peaked just as the Fed implemented its brief tightening policy last October. You can see how yields have plummeted the last several weeks and now it looks like we are going to test the low of 1.39% soon.

10Yr US Treasury Constant Maturity Index

If you recall from last week, the S&P 500 Index may be carving out an expanding triangle pattern which means a break of the December 2018 low is likely in the coming months. The price action this week was largely unchanged, however.

S&P 500 Index

The Fed releases it’s minutes on Wednesday from their last meeting so that will be the highlight for next week. As of right now, all of the news which you can read about below is starting to wake-up many players that they will be wearing their risk management hats into the Fall.

Chart of the Week!

Economic & Central Banking Snippets 

  • The Argentine peso tumbled 25% this week to a record low while the country’s main stock index plunged by the second-largest amount of any benchmark in any country since 1950, as investors retreat in the wake of President Mauricio Macri’s stunning defeat in primary elections over the weekend. Yields on shorter-term Argentine notes hit 35%. 
US Dollar to Argentine Peso
  • Singapore’s government cut its growth outlook to 0-1% from 1.5-2.5% this year, showing how the U.S.-China stand-off is hitting the region’s most trade-reliant economies. 
  • The Trump administration said it would delay imposing a 10% tariff on a series of consumer goods imported from China — including laptops and cell phones — until December, in a bid to ease fears about the trade war’s impact on markets and the economy. The reprieve from Washington was announced after Liu He, China’s vice premier, spoke with Robert Lighthizer, US trade representative, and Steven Mnuchin, the US Treasury secretary, by phone on Tuesday and agreed to have another conversation in two weeks. (FT)
  • Germany’s Zew survey of financial market experts revealed on Tuesday that economic sentiment in August had dropped to minus 44.1, its lowest since December 2011. Germany may also be heading for a recession as output fell 0.1% in the second quarter. (FT)
Germany’s Economic Sentiment
  • Indian vehicle sales fell more than 30% in July as an intensifying economic slowdown drags on what was considered among the world’s most promising car markets. It was the worst month in a dismal spell that has seen sales fall 20% or more for four consecutive months, while sales have failed to rise for more than a year. (FT)
  • China’s industrial production slowed to a growth rate of just 4.8% which is the slowest since 2002. Manufacturing and infrastructure investment led the weakness.
  • Mexico’s central bank cut its benchmark interest rate from 8.25% to 8.00%. The Bank of Mexico (Banxico) said the decision is due to the decline in inflation combined with weak domestic growth, as well as the recent US Federal Reserve’s interest-rate cut. (FT)
  • The University of Michigan consumer confidence index took a hit in August as it fell to 92.1 from 98.4 falling short of estimates of 97. It’s also the lowest since January and as seen in the chart below, it’s no higher than it was in late 2014. (Boock)
  • The July Cass Freights shipping index fell 5.9% y/o/y which marks 8 months in a row of declines. Cass Freight said in its release, “we repeat our message from last two months: the shipments index has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction.’ The company noted three things in particular: 1) ”We are concerned about the severe declines in international airfreight volumes (especially in Asia) and the ongoing swoon in railroad volumes…” 2) ”We see the weakness in spot market pricing for transportation services confirming a negative trend…” 3) “As volumes of chemical shipments have lost momentum, our concerns of the global slowdown spreading to the US and the trade dispute reaching a ‘point of no return’ from an economic perspective grow.”
  • The Producer Price Index for final demand increased 1.7% from July 2018 to July 2019. (DOL)
  • Trade among eurozone member states contracted in June at the fastest pace in over six years, raising fears that the US-China trade dispute is starting to hit European exports. The value of intra-eurozone trade, the amount each of the 19 countries are shipping to each other, dropped 6.6% in June (YOY). “With intra-eurozone trade representing more than half of total exports for most European countries, this is a serious reason for concern and it threatens to become a vicious cycle,” said Angel Talavera, economist at Oxford Economics. (FT)

Macro Snippets

  • Saudi Aramco announced a 12% drop in profits for the first half of the year to $49 billion as crude prices fell. (Bloomberg)
  • There is more than $15 trillion in government debt around the world with negative yields. (WSJ)
  • Wall Street watchdogs are poised to take a major step toward overhauling Volcker Rule limits on banks’ ability to trade with their own funds, moving to ease post-crisis safeguards reviled by the industry. (280 Securities)
  • An accounting expert who raised red flags about Bernie Madoff ’s Ponzi scheme has a new target: General Electric Co. In a research report posted online Thursday, Harry Markopolos alleges the struggling conglomerate has masked the depths of its problems, resulting in inaccurate and fraudulent financial filings with insurance regulators. Harry Markopolos report on GE’s accounting fraud can be found here:
  • Investors counting on a corporate earnings rebound in the second half of the year are risking disappointment, Michael Wursthorn reports. “The latest round of tariffs on Chinese imports compound the problems already facing many companies and threaten to stifle their profit margins. Especially vulnerable are manufacturers, miners and retailers….At best, earnings across the companies in the S&P 500 will grow 1.5% this year, FactSet projects, far short of estimates for growth of more than 6% that analysts initially forecast in January. Worse, a few analysts predict earnings could end up contracting for 2019 as a whole.” (WSJ)

That is all for now until next week’s Market Update. Thanks for subscribing!  


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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