The debt making machine is in full force as investors bought records amount of new debt issuances this week just as yields have plummeted over the last several months. Good timing for the issuers, bravo. The great enablers at the Fed were all out this week giving speeches before their next meeting on September 18th. The smell of irony is palpable as the Fed governors explain how cutting rates is a good thing and that an inverted yield curve does not matter. I doubt most of the academics at the Fed taught that lesson as part of their curriculum to their economics 101 students. In other words, they are making this stuff up as they go along – there is no playbook here.

The news cycle in August caused a ping-pong of prices in the S&P 500. Between the Fed, China’s trade status and slowing growth the stock market has had no clear direction. We did get a relief rally this week on things cooling off on the trade war with China but I don’t expect a resolution of substance anytime soon. Below is a one month chart to give you an idea of August’s price action (S&P 500 futures):

You will notice in the chart above that we did push through resistance at 2,941 AND 2,965 so that is a technical positive for the bulls. Below is the longer term chart I have of the S&P 500 Index (SPX) that shows an expanding triangle but this interpretation will be wrong if there is continued momentum higher next week.

Next week, the ECB will meet on their next move for the EURO zone and then the Fed the following Wednesday. So, the central banks will again be in focus for the next several trading sessions. It has been a tough read on the markets these past several weeks and I am sensing a fatigue factor building which may be a signal of lower prices in the coming months.

Chart of the Week!

Reserve currencies are currencies that a country holds in its foreign exchange reserve. These can be used for international payments and to support a country’s own national currency.

Economic & Central Banking Snippets 

  • The August ISM manufacturing index fell into contractionary territory with a print of 49.1, down from 51.2 in July and below the estimate of 51.3. This is the weakest reading since January 2016 as the US-China trade war weighed on the industrial economy and added to fears about slowing domestic growth.
  • Australia’s economy grew at its slowest pace since the global financial crisis as gross domestic product grew only 1.4% despite strong commodity exports. The weakness stemmed from household consumption which makes up almost 60% of the down under economy.
  • The August ISM services index surprised to the upside with a print of 56.4, up from 53.7 in July and vs the estimate of 54 in contrast with the manufacturing ISM – a rare happening.
  • China’s central bank will unleash roughly $126 billion into their financial system in an effort to boost lending there is increasing pressure from a trade war with the U.S. The People’s Bank of China said it plans to reduce the amount of reserves that commercial banks are required to keep with the central bank by half a percentage point. It will also lower the ratio for smaller banks by 1 additional percentage point, in a bid to enhance financing support for small and private firms. (WSJ)
  • Non-Farm Payrolls (jobs) released on Friday is confirming the thesis of a slowing economy as the trend for job growth in the chart below is clearly to the downside. Non-farm payrolls rose by 130,000 last month, data from Bureau of Labor Statistics showed on Friday, short of Wall Street’s expectation for 158,000, according to a Thomson Reuters survey of economists. There were also downward revisions to job growth in each of the two previous months, resulting in 20,000 fewer jobs that previously reported. (CNBC/FT)
  • Factory production in Germany dropped in July, highlighting the weakening state of the eurozone’s biggest economy as it teeters on the brink of recession. Production has fallen 4.2% from July 2018. (FT)
  • UK manufacturing activity contracted in August for the fourth consecutive month to the lowest level since 2012 as Brexit uncertainty mounted and fears of a recession deepened. The IHS Markit purchasing managers’ index for manufacturing fell to 47.4 in August from 48 in July. “Companies scaled back production in response to the steepest drop in new order intakes since mid-2012.” (FT)

Macro Snippets

  • Macron’s ‘Act 2’:  Emmanuel Macron’s cabinet has approved draft laws to cut the size of the French parliament, introduce a measure of proportional representation into National Assembly elections and replace the entire Senate in 2021. The legislation, some of which would require amending the French constitution, also includes a youth national service. (FT)
  • Argentina imposed currency controls on businesses to prevent capital flight after the peso lost more than a quarter of its value since primary elections last month. The central bank will require exporters to repatriate earnings from sales abroad, while all companies must seek authorization to sell pesos for foreign currency. (FT)
  • Truck makers are logging sharply lower orders, adding another stress point for a decelerating U.S. manufacturing sector. The U.S. trucking industry had one of its strongest years ever in 2018, as high demand for freight encouraged transportation companies to expand their fleets. Now, trade tensions and slower global growth are depressing freight volumes. In the chart below you will see production outpacing sales which causes an increase in unsold inventories. (WSJ)
  • Twenty-six U.S. oil-and-gas producers have filed for bankruptcy this year, nearly matching the 28 producer bankruptcies in all of 2018. The number is expected to rise as companies face mounting debt maturities. (WSJ)
  • Illinois’ finances aren’t just decaying at the top, they’re falling apart everywhere. The state’s one-size-fits-all pension laws and overly generous benefits have left many cities suffocating under impossible pension debts as their populations shrink, tax burdens jump and resident incomes stagnate. Of the 630 police and fire pension funds that reported data to the Illinois Department of Insurance in 2017, nearly 100 funds had funded ratios below 40%. If Illinois public safety pensions are doing this poorly in a growing economy, imagine their struggles during an eventual downturn. (WirePoints)
  • Apple, buffeted by months of declining market share and falling sales, is planning to launch a cheaper model of the iPhone next year, according to a scoop in the Nikkei Asian Review.  (FT)
  • Bond investors lapped up more than $140bn of new corporate bonds, marking the biggest weekly volume to hit global markets on record, according to data from Dealogic. “We have had a month of issuance in three days,” said Andrew Brenner, head of international fixed income at National Alliance Securities. U.S. companies said they would use the cash raised to repay other debt and extend the average maturity of their bonds, according to analysts at Bank of America Merrill Lynch, rather than increasing leverage. (FT)
  • Junk bond issuance YTD hits $167.9BN, surpassing 2018’s entire junk volume ($165.4BN)….what could go wrong?????

That is all for now until next week’s Market Update. Thank you for being a subscriber!  


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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