Taper Train Coming!

The upcoming Fed meeting on Wednesday (2PM) will be newsworthy as the market expects a change in policy where bond purchases will be ramped down into 2022. The rate at which they taper purchases is debatable but most think it is reasonable to assume they will go to zero by the middle of next year. That is a big change but inflation is running too high and the “transitory” argument is now mocked any time it comes up in conversation. At the September meeting there was mention of raising interest rates next year so we may get some clarity on that, too.

The Fed is a bit behind the curve, however, as central banks across the globe have already started to raise interest rates and end their purchasing programs (quantitative easing). The change in global central bank policies is beginning to show up in the short end of their respective yield curves in October – the rate of change is the most notable thing here:

US 2YR: 0.28% > 0.53%

Australian 2YR: 0.04% > 0.775%

Canadian 2YR: 0.50% > 1.02%

UK 2YR: 0.41% > 0.68%

The Fed is the big dog among central banks so their policy has the most impact. The last time the Fed withdrew liquidity in 2018 caused the stock markets to fall double digits so I think they will try and be transparent this week and not throw a hand grenade into the stock market.

As we approach the Fed meeting, the S&P has bounced higher from the October 1st low after a month long correction in September. However, the most recent push higher has created a negative divergence in the Relative Strength Index (RSI) below – denoted by the white line. This shows the uptrend is weakening and that a pullback is likely in the coming sessions or maybe after the Fed meeting (just speculating).

Chart of the S&P 500 by Kisco Capital

I have included a chart below of the Russell 2000 (growth companies) which shows a consolidation period starting all the way back in January. A break of the upper boundary ($235.41) would begin a breakout up to the $250 to $280 area but this may not happen until the S&P has another pullback and the Fed makes clear what comes next with their monetary policy.

Russell 2000 Index by Kisco Capital

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Economic & Central Banking Snippets 

Durable Goods Orders
  • Orders for durable goods such as appliances, computers and cars fell 0.4% in September, the first drop since spring, as manufacturers continued to confront higher material costs and parts and labor shortages. But in one positive sign, businesses continued to step up spending on machinery and other projects that could make them more efficient in the long run. New orders for non defense capital goods excluding aircraft rose 0.8%, the eighth straight monthly gain. (WSJ) 
  • Personal income in September fell by 1% m/o/m, more than the estimate of down .3% but it was all because of the sharp decline in unemployment insurance as the extra benefit program expired after Labor Day. Most importantly was the 0.9% m/o/m jump in private sector wages and salaries and is running at a 10% increase for the last 6 months annualized. (Boockvar)
Inflation Gauges
  • The consumer-price index (CPI) rose 5.4% in September over the previous year, the Labor Department reported.
  • The PCE inflation figures both headline and core were as expected for September, up 0.3% and 0.2% respectively. Versus last year, headline PCE is up 4.4% and the core by 3.6%. Goods prices rose by 6.1% and service prices were up by 3.5%. Energy prices jumped by 25% y/o/y and by 4.1% for food.

Macro Snippets

Microchip Demand
  • The global semiconductor shortage is worsening, with wait times lengthening, buyers hoarding products and the potential end looking less likely to materialize by next year, Stephanie Yang and Jiyoung Sohn report. Demand didn’t moderate as expected. Supply routes got clogged. Unpredictable production hiccups slammed factories already running at full capacity.

That is all for now and thank you for being a subscriber!

Paul McCarthy of Kisco Capital, LLC

Regards,

Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.