Another sharp drop this week may be warning that we are approaching a top in the coming weeks. The rotation of various sectors is getting tired and thinner which means the market is weakening as it pushes higher. It is possible that a top is in place but the price action on Friday rebounded high enough to open the door to one more new high. I would expect that the 4550 area would be an upside extension with a lot of resistance so we will see what happens in the coming sessions. If we break below last week’s low than it is likely a top of some degree is in place.

The Fed was in the spotlight this week as the minutes from their last meeting was released on Wednesday where several governors expressed the desire to reduce bond purchases within the next six months. The last time the Fed tried this was Q3 of 2018 which caused a three-month corrective period that dropped the stock market 22%. The market will be watching for clues in a speech by Fed Chair Powell at the Jackson Hole Symposium on Friday. He may provide some clarity on the minutes but that is unlikely as the next Fed meeting is September 22nd and why not wait a few more weeks. However, he may float the idea of a new policy metric such as incorporating the rising cases of the delta variant as part of their decision making process. This would give them cover and save face if they decide to keep the QE spigot wide open until sometime in 2022.
Chart of the Week!
The chart below is provided by Elliott Wave International and shows the parallel path the coronavius may be taking with the Spanish Flu from 100 years ago! Will the financial markets follow this pattern? I think most countries have limited ability to shut-down like last year but we are seeing this happen as the world’s 3rd busiest container port, Ningbo-Zhoushan in China is partially shut-down because of the delta variant. Also, New Zealand is essentially shutting down their entire country and Australia is having issues in Sydney due to a few covid cases. Additional lockdowns may be in store on a country by country basis going into the Fall months.

Economic & Central Banking Snippets
- Initial jobless claims fell to a pandemic low of 348k from 377k last week. Continuing claims totaled 2.82mm from 2.90mm in the week prior in a sign that the job market continues to recover.
- US industrial production in July rose by 0.9% verses June and manufacturing rebounded by 1.4% but these metrics are restricted by a hobbled supply chain (they have potential to run hotter).
- The Fed talks of tapering within six months but their balance sheet grew by $85.4b this week to another record high of $8.34 Trillion.
- The August Philly manufacturing index fell to 19.4 from 21.9 which is the lowest reading since December 2020.
- Some worldwide inflation numbers compared to 2020: Canada’s CPI is up 3.7%; Germany’s PPI is up 10.4%; and U.K. wholesale prices are up 10%.
Macro Snippets
- Toyota is cutting production in Japan by 40% in September and in North America by 40% to 60% in August because of a shortage of semiconductors. Ford and GM said this week they are scheduling more downtime at several North American factories, in part because virus-related restrictions overseas are adding to chip-supply constraints. (WSJ)

- Pfizer and Moderna are on track to notch billions more in sales than previously expected, as new booster-shot strategies and concerns about the Delta variant push demand, and the companies raise prices. Drugstores that will administer booster shots also predict a bump in sales. With many government-run mass-vaccinations sites closed, some have already seen demand grow.
- First-time issuers of junk bonds from companies including Michaels Stores and Square are on pace to set a 16-year record, with over $68 billion of debt sold as of August 17th, according to S&P Global Market Intelligence’s LCD. Overall, it is a banner year for junk bonds as U.S. companies issued over $316 billion through the end of July – 32% higher than last year’s record-breaking totals. The rally in junk bonds is a sign that investors are still betting on a stimulus- and vaccine-fueled U.S. economic recovery.

That is all for now and thank you for being a subscriber!
Regards,
President – Kisco Capital