Tapering on the Way

Federal Reserve Asset Holdings

The Fed meeting on Wednesday announced what we knew was coming – a change in Fed policy. The details of tapering bond purchases will probably be announced at their November meeting. And most market pundits agree that the policy will be implemented starting in December. As you can see in the chart to the right, the Fed had been reducing the size of their balance sheet before the pandemic. However, the size of their holdings exploded to support the credit markets as the coronavirus brought the economy to a standstill. And now their task of reversing these pandemic purchases will be monumental. Inflationary pressures are mounting as supply chain issues clog up the economy so the Fed may be preserving their optionality in sizing their taper and don’t forget they can also raise interest rates.

The S&P 500 sold off most of September and bottomed on Monday before the Fed meeting. The pullback also took out the August low which opened up the door to a much deeper correction but the rebound after the Fed meeting was strong and a good indication it is over. Also, volatility fell off a cliff to close out the week which is another technical indicator that the S&P 500 will rebound to new highs in the coming weeks. A move above 4455 early next week would put a confirmation on this week’s bottom. If there is a larger correction looming, I would expect it to manifest sometime around when the Fed begins to taper their bond purchases.

S&P 500 Futures

Chart of the Week!

Factoring in the current high rate of inflation, most of the junk bond market is trading at negative real yields.

US HY Bond Market Real Yields 2021

Economic & Central Banking Snippets 

  • The September NY manufacturing index jumped to 34.3 from 18.3 where new orders more than doubled. However, backlogs rose and delivery times are at a record high as the supply chains remain strained.
  • Headline CPI headline inflation is up by 5.3% verses last year. Core CPI is running at a 6 month annualized pace of 6.4% and the headline rate by 7.4%.
  • The Norges Bank in Norway hiked rates off zero by 25 bps.
  • The Bank of England expressed concern with inflation and a rate hike is possible in Q1 2022 after QE ends in December.
  • Germany said its producer price index for August spiked 12% verses last year. Year to date it is running at an annualized rate of 15%.
  • Japan‘s exports grew by 26.2% in August year-over-year, led by strong shipments of chip manufacturing equipment. It was the sixth straight month of double-digit growth, as chip-making equipment sales offset slowing shipments of cars to Europe and the Americas.  (Investopedia)
  • Americans briskly increased spending at retailers last month, while employers have largely resisted the urge to lay off workers both signs of strong demand in the economy. Sales at the nation’s retailers rose 0.7% in August, rebounding from a drop in July according to the Commerce Department. (WSJ)
US Retail Food Services

Macro Snippets

Cargo Ship Delays
  • Toy makers, booksellers, large retailers and manufacturers around the world are already warning that some products won’t be in place in time for Christmas, while extra shipping costs and delays are adding to bills for both buyers and sellers. (WSJ)
  • Walmart+ grew to an estimated 32 million U.S. households over the past year, according to research by Deutsche Bank. The premium subscription service, which launched just a year ago, is gaining popularity among younger shoppers. (Investopedia)
  • Chinese authorities are asking local governments to prepare for the potential downfall of Evergrande, the largest real estate developer in China. This signals that officials are reluctant to bail out the property developer while bracing for any economic and social fallout from the company’s travails.
Evergrand Bond Prices
  • Nike: The sneaker giant reported a 16% rise in quarterly revenue but said production problems in Asia and trans-Pacific shipping delays are constraining sales. (WSJ)
  • Costco will bring back limits on buying household essentials like toilet paper and cleaning supplies. The membership warehouse chain says it wants to make sure those items stay on shelves as it deals with supply chain issues and truck driver shortages amid the rise of the Delta variant.
  • House Democrats proposed ending backdoor Roth IRA strategies for the wealthy, along with new limitations on types of investments that can be held in IRAs, according to an outline released by the House Ways and Means Committee.  
  • Chevron is tripling spending in its new low-carbon unit, pledging to spend $10 billion through 2028 on technologies such as biofuels and hydrogen production. The spending boost reflects optimism in Chevron’s new energies unit, which the company now expects to generate more than $1 billion in operating cash flow by 2030. (WSJ)
  • Inflation has heated up this year for several reasons, including a rapid economic rebound, recovery of prices for services hardest hit by the pandemic—such as air travel and accommodation—higher labor costs and rising prices for materials due to supply chain disruptions. (WSJ)
Paul J. McCarthy III

That is all for now and 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.