The month of September should be an interesting ride as the chart patterns and technicals are warning of a top as the Fed prepares to dial-back their quantitative easing program by tapering (buying less) bonds. The details of this policy change should be revealed at their next meeting (9/22) as inflation numbers are finally forcing their hand to do something. This Fed tried this policy in Q3 of 2018 and it failed miserably as the S&P tanked 22% and junk bond markets froze until the Fed threw in the towel just before Christmas (markets rebounded the following January).
You can see the selling in the chart below after topping at 4550 (wave 5) – the dive became more pronounced into the close on Friday. There is support in the 4425 area but the S&P needs to hit the brakes early next week or the next stop will be near the August low at 4348. If there is a larger degree correction underway, then a target near 4100 is probable but it is a little early to make that call while the S&P holds these support levels. I have seen scenarios where markets sell-off into a Fed meeting when there is a signal to tighten policy (like we have now). However, in most cases, the Fed backs-off and the market continues higher. This time looks different to me so I do think we will get a tightening policy in the coming months. If support does hold next week, the S&P may rally into the meeting only to correct after the announcement. Either way, it is now a roller coaster environment with higher levels of volatility. Stay tuned!
Chart of the Week!
I thought this chart was very interesting as it shows energy usage by type for each state – natural gas is the clear winner.
Economic & Central Banking Snippets
- The Atlanta Fed’s Wage Growth Tracker is showing some acceleration as it posted a +3.9% gain verses last year which is the fastest rate since 2008.
- The Reserve Bank of Australia is tapering bond purchases by cutting weekly bond purchases through February.
- The headline Producer Price Index (PPI) was reported 8.3% higher than last year and the core was up 6.7% (ex food and energy). The annualized rate of PPI gain for core goods is now 10.8% over the last six months.
- This week, the Fed released its Beige Book of regional economic activity and it said that economic growth downshifted to a moderate pace in early July thru August. There were some strong sectors like manufacturing, transportation, non-financial services and residential real estate. However, there was a deceleration in eating out, travel and tourism in most Districts due to safety concerns regarding the Delta variant of the coronavirus.
- Bond managers are piling into debt with rock-bottom credit ratings. This buying spree has driven yields down so far that investors have rarely been compensated less for taking below investment-grade credit risk.
- Ukraine’s parliament adopted a law that legalizes and regulates cryptocurrencies – the fourth country to do so in the past five weeks. By 2022, the country plans to open the cryptocurrency market to businesses and investors, according to the Kyiv Post. (Investopedia)
- This year is on track to set a record for purchases of U.S.-based marijuana companies. Transactions worth $5.5 billion have closed so far in 2021, according to Viridian Capital Advisors, compared with roughly $3 billion last year and $3.7 billion in 2019.
That is all for now and thank you for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital