To QE or…..

The European Central Bank (ECB) lasted nine months without their Quantitative Easing program as their stimulus measures are again needed to support the slowing EURO zone (more below). Is the Fed next?

We will have additional clarity on Wednesday where the market expects the Fed to cut interest rates 25bps and perhaps provide some forward guidance. On Thursday, we will get rate decisions from the Bank of England (BoE), the Bank of Japan (BOJ) and the Swiss National Bank. There may be a concerto of stimulus or a swan dive of disappointment a week from now.

In typical fashion, the stock market has brought the S&P 500 right back to the July highs in front of all these meetings. Since the S&P 500 has largely been going sideways since the January 2018, we are either in the process of forming a long-term top or getting ready for the next leg up in the stock market.

SPX: S&P 500 Index

The fundamentals across the globe are in a weakening state so stocks will need a nitro boost from the central banks. At this point, however, more QE programs will be like pushing on a string – little return for the effort. Ultra-low rates encourage financial engineering (borrowing & buybacks) over capital investment (building factories & innovation) so these policies are becoming counter-productive and will end someday but probably not next week.

What counts is market expectations verses what is delivered by the central banks next week. This could mean that additional stimulus measures fall short and are met with weaker stock prices. One notable to also consider is the dollar and its strength verses other currencies. A continued strong dollar in the coming months means capital flows will be aimed towards buying US stocks and bonds. On the other hand, if next week is an all-around disappointment then we are likely to fill the gaps in the S&P 500 chart above and re-test significantly lower.

Chart of the Week!

Economic & Central Banking Snippets 

  • The European Central Bank (ECB) is to launch a new round of stimulus for the eurozone economy in a bid to tackle sluggish growth and persistently low inflation. At a meeting of its governing council in Frankfurt on Thursday, the ECB lowered its deposit interest rate further into negative territory and decided to launch another round of bond-buying. It will cut its deposit rate from minus 0.4% to a new record low of minus 0.5%. The bank will also restart its quantitative easing (QE) program, buying €20bn of bonds every month from November onwards. It is the first time the ECB has cut rates since March 2016; the resumption of QE revives a bond-buying program that the ECB paused last December after buying €2.6tn of bonds. In new guidance on its future plans, the ECB signalled that interest rates will stay lower for longer than it previously expected. (FT)
  • Car sales in India tumbled more than 40% in August as the worst industry slowdown in recent memory deepened, intensifying concern that months of steep declines could spark a full-blown crisis. Passenger car sales for the month came in at 115,000, down 41% from a year earlier, according to the Society of Indian Automobile Manufacturers. India’s car industry was once among the world’s most promising, however, there has been a year-long liquidity squeeze caused by defaults in India’s shadow banking sector, which contributed almost half of new credit for vehicle purchases. (FT)

Macro Snippets

  • Ford’s credit rating has been cut to junk by Moody’s Investors Service, which cited weak earnings and cash generation as the carmaker undergoes a costly restructuring. The company has announced job cuts and plant closures in Europe, while also reducing salaried staff across the globe. (FT)
  • Restaurant Brands, which owns the Popeyes and Burger King chains, sold 8.5-year bonds with a coupon under 4%, a record low yield for a US junk issuer.
  • California lawmakers have approved a landmark bill that requires companies like Uber, Lyft and DoorDash to treat contract workers as employees. Some estimates suggest costs for those firms would increase by 30% as a result, while opponents of the bill say it will hurt those people who want to work flexible hours. A coalition of labor groups is pushing similar legislation in New York, and bills in Washington State and Oregon could see renewed momentum. (Seeking Alpha)
  • The pace of retail bankruptcies and store closures in the U.S. has accelerated so far this year. More retail bankruptcy filings are expected in the second half of the year, and bricks-and-mortar stores will continue to close at a higher rate, according to a report released Wednesday by professional services firm BDO USA LLP. Talk of a retail apocalypse has echoed throughout the industry for years as shoppers abandon the nation’s malls and flock to online sellers. (WSJ)
  • Congress is ramping up its probe into Big Tech, with House lawmakers demanding emails and executive communications from four technology giants as they look for evidence of anticompetitive behavior. House Judiciary Committee leaders from both parties asked, Facebook, Apple and Alphabet, owner of Google, to provide by Oct. 14 reams of documents including executive communications and financial statements as well as information about competitors, market share, mergers and key business decisions. (WSJ)

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.