The Fed REPOrt

A big week of central bank news that may have disappointed the stock market bulls. The Fed cut 25bps this week but tapped the brakes on additional stimulus measures (for now). Let’s take a look at the S&P 500 chart where we are hovering just below all-time highs after a very choppy August.

SPX – S&P 500 Index

September is the weakest part of the calendar so a failure to make new highs this past week may mean we are in for some downside price action next week. By the way, it would be normal for the gaps in the chart above to get filled in the next pullback.

There is also something awry in the funding markets. The overnight lending rate was sounding alarm bells this week as rates spiked in something we haven’t seen since the financial crisis. Overnight lending is a very stable market among US banking institutions, when rates spike it means that banks have lost faith in lending to one another which occurs when an institution is at risk of failure, for example.

The spike earlier in the week was reported to be caused by corporations in need of cash to pay taxes on 9/15 combined with a $54B settlement of Treasury coupons on Monday. The Fed needed to step in and lend through a REPO facility to grease the skids and provide the cash to the overnight markets. Funny thing, the Fed had to keep this operation open for the remainder of the week. Late Friday, the Fed announced that the emergency REPO facility would remain open until October 10th.

This is not a good sign. Funding emergencies don’t fit the picture right now unless we are on the cusp of something very bad about to happen in the lending and credit markets. Despite my best efforts, I found no reason other than what I mentioned above for this situation so this all sounds very suspicious to me. The cash needs for taxes and Treasury coupons makes sense but these requirements were not a secret and they should have been satisfied within a day (maybe two).

The facility does report its daily activities so we can monitor the Fed’s REPO facility and wether this heightened activity continues into next week. If the facility continues to be oversubscribed then we know there is a problem lurking somewhere. It could be caused by an overseas institution so I am not saying U.S. banks are in trouble – just that there is a new risk parameter being thrown into the stock market. More on this topic next week.

Chart of the Week!

Economic & Central Banking Snippets 

  • The Cass Freight Index released its August shipping data last week and the index fell for the 9th straight month by 3% (Y-O-Y). The company said “weakness in demand is being seen across most modes of transportation, both domestically and internationally…we see a growing risk that GDP will go negative by year’s end.” The company cited three areas of main concern: 1) severe declines in international airfreight volumes 2) weakness in the spot market pricing for transportation services, especially in trucking and 3) volumes of chemical shipments.
  • Economic activity in China cooled further in August, with industrial output and retail sales data suggesting sluggish demand and low confidence among businesses and consumers. China’s leaders have already responded to signs of weaker growth with extra support for local-government bond issuance and by releasing more funds for banks to lend to businesses. (WSJ)
  • Industrial production surprised to the upside in August, rising by .6% m/o/m vs the forecast of up .2%. Manufacturing production in nominal terms is still below where it was in 2008.
  • The Federal Reserve cut US interest rates by 25 basis points to a range of 1.75% to 2% and signaled that it could stop there despite uncertainty over trade. The cut was expected but the projections show a more hawkish line than markets had anticipated. (FT)
  • The Swiss National Bank (SNB) held interest rates steady at their meeting this week as it slashed its growth forecast for the year amid rising global headwinds. The bank is leaving its key rate at -0.75% and said that the deterioration of the international economic environment will probably cause growth to weaken. (FT)
  • The Bank of Japan (BOJ) has kept monetary policy on hold but hinted at possible action in October as it frets about a slowdown in the global economy. Japan’s central bank on Thursday held overnight interest rates at -0.1%, kept its target for 10-year bond yields at 0% and maintained the pace of its asset purchases at ¥80tn ($740bn) annually. The BOJ also expressed concern that an appreciation in the yen would harm Japanese exports that are already suffering from a slowdown in China. (FT)
  • U.S. home sales in August rose to the highest level in nearly a year and a half, sparking fresh hope that a protracted slump may finally be starting to reverse. The latest data strengthened the case that some of the lowest mortgage rates of the past 50 years may at last be luring more buyers back into the housing market. (WSJ)

Macro Snippets

  • Factory workers at General Motors went on a nationwide strike early Monday morning in the largest work stoppage in more than a decade. UAW leaders instructed nearly 46,000 blue-collar workers at 31 GM plants to either walk off the job or stay home. One of the biggest sticking points is the company’s decision in November to close four U.S. factories. GM’s credit rating could also topple into junk bond status if the strike lasts more than a week or two, according to Moody’s. (WSJ)
  • WeWork shelved its initial public offering on Monday night after struggling to drum up investor interest in the multibillion-dollar listing, in an embarrassing setback for a property group whose stated mission is to “elevate the world’s consciousness”. (FT)
  • FedEx had its biggest price drop since 2008, falling nearly 14% after reporting earnings this week. The company guided earnings down over concern regarding global trade and their lack of deliverability.

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.