The Fed cut interest rates on Wednesday for the third time this year indicated that they are likely done for the foreseeable future. Also, the Repo operations that began in mid-September will continue into next year where the Fed is purchasing up to $60B of T-bills on a monthly basis. Chairman Powell tried to differentiate this operation from their previous QE programs but as long as their balance sheet is expanding the stock market will absorb the additional liquidity added to the system.
Manufacturing has been waning over the past six months so this rate cut is welcomed by corporate America. Consumers will also get a break on their credit cards, auto loans and mortgages that should buoy spending into the holiday shopping months.
The temperature on the trade war with China looks to be cooling off as both sides have agreed to structure a deal in three phases. Reports indicate the final touches on Phase 1 are nearing completion and that a location for Xi and Trump to execute the agreement will be announced in the coming weeks. The big picture here is that China needs a deal to avoid an economic slowdown in 2020. So, expect more noise in the news cycle but a deal of some kind will happen.
The S&P 500 below has had several opportunities to breakdown in 2019 but it hasn’t happened. We did get a break of a major trend line on Friday that has acted as strong resistance as you can see below (yellow line).
Things look they are turning for the better in the stock market. Growth stocks are catching a bid, the China trade deal is progressing, interest rates will remain low, GDP readings held up this week and the earnings season is shaping up to be better than expected. Some good follow-thru next week would be a good technical sign that a new uptrend is in its early stages.
Chart of the Week!
The following are the stocks and sectors that stand to win or lose the most regarding the outcome of trade negotiations with China.
Economic & Central Banking Snippets
- The U.S. housing market is gaining modest strength thanks to lower mortgage rates. Average national home prices picked up, the number of Americans who own a home grew and pending home sales rose in a trio of separate indicators. (WSJ)
- US economic growth cooled in Q3 to the slowest pace of 2019 as GDP expanded at an annualized 1.9% rate according to the US commerce department (Q2 was 2%). Consumer and government spending accounted for most of the growth as business spending has slowed.
- The US Federal Reserve dropped its main policy rate by 25 basis points on Wednesday. The statement issued by the Fed suggest there is no plan for any immediate further action. (FT)
- U.S. households increased spending heading into the fourth quarter, suggesting consumers have continued to prop up economic growth. Personal-consumption expenditures rose a seasonally adjusted 0.2% in September from the prior month, same as August. (WSJ)
- U.S. employers added 128,000 jobs in October, much higher than the forecast of 75,000. The job gains were notable given the GM autoworkers strike throughout October. The unemployment rate ticked up a bit to 3.6%, but still remains near multi-decade lows. The job gains for both September and August were revised sharply higher. For the year, monthly job creation now averages 167,000 compared with 223,000 in 2018. Job growth was strongest in the food and beverage service sector of the economy, while manufacturing and government jobs posted the worst declines. (Investopedia)
- The U.S. manufacturing purchasing managers index from the Institute for Supply Management (ISM) came in lower than expected as the effects of the GM strike last month slowed down manufacturing activity in auto-related industries. The manufacturing sector showed its first contraction in a few years in August, ending a 35-month expansion period. (Investopedia)
- One of the brightest spots in Friday’s jobs report: Prime-age participation and employment. The share of workers ages 25 to 54 either working or looking for a job rose to the highest level since 2009. The share that’s employed hasn’t been higher since 2001. (WSJ)
- The new labor deal secured at General Motors to end a 40-day strike will not only add to the auto maker’s labor costs but could also pose problems for its Detroit rivals. The United Auto Workers will use the agreement at GM as a template that is expected to reach similar terms on wages and benefits in separate contract talks with Ford and Fiat Chrysler Automobiles, under the union’s traditional pattern bargaining. (WSJ)
- British lawmakers voted overwhelmingly to hold a December election, a roll of the dice by parties across the political spectrum to try to either cancel or deliver Brexit after years of wrangling in Parliament. The decision paves the way for one of the most unpredictable and divisive national ballots Britain has seen in a generation. (WSJ)
- China has stepped up its charm offensive to attract U.S. and other foreign companies in recent weeks, seeking to offset the debilitating impact of the trade war. The move suggests a growing realization of the trade war’s toll on the Chinese economy and on U.S. companies’ willingness to invest in China. It also reflects a recognition that foreign companies are key to achieving Chinese leaders’ ambitions for both growth and technological advancement, Yoko Kubota, Chao Deng and Lingling Wei report. (WSJ)
- Prologis, the world’s largest warehouse company, has agreed to acquire rival Liberty Property Trust for $12.6bn in a deal that emphasises the robust demand for such properties in the ecommerce era. The deal comes at a time when industrial warehouses — once a relative afterthought in the property industry — have become among its hottest investments. Consumers are demanding ever-faster deliveries for a growing menu of items and state-of-the-art warehouses near big markets have become essential to retailers such as Amazon, Target and many others. (FT)
- The Interior Department is grounding its entire fleet of aerial drones, one of the largest in the federal government, citing increasing concerns about the national-security risk from Chinese manufacturers, according to a person familiar with the matter. (WSJ)
- Apple’s Tim Cook reported that Apple Pay transactions are growing four times as fast as PayPal, adding that Apple Pay is now “live” in 49 markets internationally, “with over 6000 issuers on the platform.” (Apple Insider)
That is all for now until next week’s Market Update. Thank you for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital