Friday, August 12, 2022

Markets rally for its 4th straight winning week

Dow jumped 424 (session high),  advancers over decliners 4-1 & NAZ was up 267.  The MLP index settled 1+ higher to the 215s & the REIT index went up 6+ to 450.  Junk bond funds rose along with stocks & Treasuries continued strong, reducing yields.  Oil dropped 2+ to the 91s & gold added 10 to 1817 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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The rapid pace of inflation eased in Jul for the first time in months, but the slowdown in price gains is likely not enough for the Federal Reserve to take its foot off the brakes as it tries to cool the US economy & tame rising costs.  The Labor Dept reported that the consumer price index rose 8.5% in Jul from a year ago, below the 9.1% year-over-year surge recorded in Jun.  Prices were unchanged in the one-month period from Jun.  The core measure – which strips out food & energy – climbed 0.2% in Jul & 5.9% from the previous year, a marked slowdown from Jun.  While the moderation is likely a welcome respite for the Fed as it tries to wrestle inflation under control, consumer prices still remain at a painful, multi-decade high.  On top of that, the Labor Dept reported last week that employers unexpectedly added 528K jobs in Jul – nearly double the estimate – suggesting the economy is still red-hot.  Fed policymakers have signaled in recent days that they remain inclined to approve another mega-sized interest rate hike – either 50 or 75 basis points – when they meet in Sep.  There will be another round of inflation & jobs data before the meeting on Sep 20-21.  "I still think 50 basis points is the case, but I am open to 75 should the data evolve differently," San Francisco Fed Pres Mary Daly said.  She added that while the Jul figures are "significant… they're not victory."  "It really behooves us to stay data dependent and not call it," she added.  Traders are split over how big the Fed may go in Sep, with 55% pricing in a chance of a 50 basis point increase & 45% putting their money on a 75 basis point hike in the fall, according to the CME Group's FedWatch tool.

Fed likely to continue with rapid interest rate hikes despite inflation respite

Despite positive inflation data this week, Richmond Federal Reserve Pres Thomas Barkin said that more interest rate increases will be needed to tamp down price pressures.  Releases this week showing that consumer & wholesale price increases softened in Jul were “very welcome,” Barkin said.  “So we’re happy to see inflation start to move down,” he added.  But he noted that, “I’d like to see a period of sustained inflation under control, and until we do that I think we’re just going to have to continue to move rates into restrictive territory.”  Headline consumer prices were flat in Jul while producer prices declined 0.5%, according to the Bureau of Labor Statistics.  However, that was just one-month's data: CPI still was up 8.5% on a year-over-year basis & the producer price index climbed 9.8%.  Both numbers are still far above the Fed's 2% long-run inflation objective, so Barkin said the central bank needs to keep pushing forward until it achieves its goal.  “You’d like to see inflation running at our target, which is 2% at the PCE, and I’d like to see it running at our target for a period of time,” he continued.  The Fed uses as its preferred gauge the personal consumption expenditures price index; Jun headline PCE ran at a 6.8% annual rate while core excluding food & energy was at 4.8%.  Barkin's comments reflect those of most Fed officials who have spoken recently about rates.

Fed’s Barkin says rate increases need to continue until inflation holds at 2%

The average American is shelling out an extra $717 a month because of the hottest inflation in decades, according to a new analysis from the Joint Economic Committee Republicans (JEC).  The financial squeeze stems from the rising cost of a number of everyday goods, including cars, rent, food & health care.  While the rapid pace of price increases eased slightly in Jul, the consumer price index still climbed 8.5% from the previous year – hovering near a painful, 4-decade high, the Labor Dept.  The JEC – who launched the State Inflation Tracker in Apr to monitor how much higher prices are costing Americans across the US – calculated the figure by comparing prices for goods & services in Jul versus how much households would have paid for those same items in Jan 2021, when inflation was 1.4%.  "While prices did not change from June to July 2022, prices increased 13.3% from January 2021 to July 2022, costing the average American household $717 in July 2022 alone," the analysis said.  Even if prices stopped increasing altogether, the inflation that already occurred between Aug 2021 & Jul 2022 would cost the average American household an extra $8607.  Scorching-hot inflation has created severe financial pressures for most US households, which are forced to pay more everyday necessities like food & rent.  The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily impacted by price fluctuations.  Although American workers have seen strong wage gains in recent months, inflation has eroded those entirely.  Real average hourly earnings actually decreased 0.5% in Jul from the previous month when accounting for higher consumer prices, according to the Labor Dept   On an annual basis, real earnings actually dropped 3% in Jul. 

Inflation costing the average American $717 a month, analysis shows 

Gold prices closed higher, helping the yellow metal clinch a 4th straight week of gains & adding to a rally that started late last month after the Federal Reserve announced its latest interest rate increase.  Gold also posted its longest streak of weekly gains for the most-active contract in seven months,  Gold contracts expiring in Dec rose $8 (0.5%) to settle at $1815 per ounce, with the most-active contract sweeping to a 4th straight weekly advance, its longest run this year,  Gold booked another weekly gain, even as the $ climbed today.  Looking ahead, investors will be awaiting the release of the Federal Open Market Committee’s minutes, expected to be released next Wed.

Gold ends higher Friday to score fourth week in a row of gains, the most since December

Oil futures ended lower after news reports indicated supply disruptions in the Gulf of Mexico were likely to be short lived.  The pullback cut into weekly gains attributed to easing worries about recession in Europe & the US in particular.  West Texas Intermediate (WTI) crude for Sep fell $2.25 (2.4%) to close at $92.09 a barrel, leaving the US benchmark with a 3.5% weekly rise.  Oct Brent, the global benchmark, was off 76¢ (0.8%) at $98.84 a barrel, for a 4.1% weekly advance.  A Louisiana official said a damaged oil-pipeline component was due to be replaced by the end of the day,  The damaged flange had disrupted flows from offshore platforms in the Gulf.  The number of US oil rigs last week rose by 3 to 601 this week, according to oil-field services firm Baker Hughes.  The energy complex was previously in bounce mode after WTI fell more than 9% last week & Brent dropped 8.7%.  Crude oil subsequently found a footing after last Fri's strong US jobs report & inflation data this week that showed price pressures moderating.  That was boosting hopes that the Federal Reserve wouldn't need to raise interest rates as aggressively as feared, potentially leaving room for policy makers to rein in still red-hot inflation without sending the economy into recession.

Oil ends lower as worries over Gulf outage ease, but crude books weekly gains

After investors have seen a lot selling this year, Dow rose an amazing 2400 in the last 4 weeks.  Another way to look at the advance is it returned to where it was in early May (see below).  It's still down over 4K YTD.  High inflation remains a huge problem.  Even if WTI sloshes around the lows 91s, high priced gas is being felt by many.  The Fed has its work cut out to reduce inflation while not bringing on a significant recession.  For the time being investors are feeling better than they have in recent weeks.  Have a good weekend!!

Dow Jones Industrials 

Markets extend their rally for a fourth straight winning week

Dow rose 121, advancers over decliners 2-1 & NAZ went up 124  The MLP index was little changed in the 214s & the REIT index added 3+ to the 448s.  Junk bond funds crawled higher & Treasuries were purchased, reducing yields.  Oil was off 2 to the 92s & gold was steady at 1807.

AMJ (Alerian MLP index tracking fund)




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With the House of Representatives set to pass Dems' social spending, tax & climate bill, energy industry officials are ringing alarm bills that it will handicap their industry at the onset of a recession.  "We believe on balance that this bill is going to do more harm than good for America's energy sector, given the increase in taxes and fees that are going to hit many American energy producers," American Exploration & Production Council CEO Anne Bradbury said.  "With the potential that we are in a recession now, we think that it is a bad idea to be raising taxes on American companies, including American energy producers."  But Sen Joe Manchin said the bill will generally help the fossil fuel industry & one energy policy expert says the overall effect of the bill may be more muted, in part due to poorly directed spending.  The House is set to sync up with the Senate today, sending the bill to Pres Biden's desk in what many Dems consider to be their biggest legislative win yet.  Energy industry groups say taxes in the bill are likely to be among the most harmful factors to their bottom lines.  The American Gas Association, along with more than 2 dozen other industry groups, said in a letter to Congress that a $6.5B tax on methane emissions would result in consumers paying about 17% more for natural gas.  The conservative group Americans for Tax Reform also lists multiple other levies on energy it objects to in the bill, including a $12B tax on imported petroleum products & a $1.2B  tax on coal mining.  A coalition of state coal associations wrote to Manchin specifically railing the taxes included in the bill, arguing that would make their tax bills more complex.  Manchin wrote back to them in a pointed letter, pushing back on the characterization of the coal mining levy as a new tax.  That tax has been around since 1985, he wrote & only recently lapsed.

Energy reps sound alarm on Dems' spending bill during recession

Pres Biden's administration refuted claims that a forthcoming visit by Chinese Pres Xi Jinping to Saudi Arabia signals America's waning influence in the Middle East, insisting that the US is “not going anywhere.”  Tim Lenderking, US special envoy for Yemen, said that diplomatic visits by other global powers were to be expected, but said that the US had asserted its commitment to the region following a visit by Biden in Jul.  “The major message that the president brought to the region is that the United States is not going anywhere,” Lenderking said.  Reports emerged today that Xi is to arrive in Saudi Arabia next week for a meeting with Crown Prince Mohammed bin Salman — the Chinese premier’s first official foreign visit since 2020 — as Beijing & Riyadh seek to consolidate ties.  China's foreign ministry yesterday neither confirmed nor denied the reports.  That Xi is expected to be met with all the pomp & fanfare afforded to former Pres Trump during his 2017 visit does little to improve the optics of Biden's visit, which was a low-key affair that critics say achieved little amid strained personal ties between the 2 leaders.  However, Lenderking insisted that the US retains a “vital” presence.  “The United States is a vital partner to not only Saudi Arabia but each of the countries in the region,” he said.  “America can be counted on to remain in the neighborhood as a support for the countries and their security. That is an American priority,” he added.

U.S. is ‘not going anywhere,’ Middle East envoy says, as China’s Xi expected to visit Saudi Arabia

Long-term Treasury yields were slightly lower as market participants sorted thru a busy week of economic data.  The yield on the benchmark 10-year Treasury note dipped more than 3 basis points to 2.853% & the yield on the 30-year Treasury bond also ticked about 3 basis points lower to 3.124%.  Yields move inversely to prices & a basis point is equal to 0.01%.  The shorter-term 2-year Treasury yield rose slightly to basis points to 3.236% after slipping in the previous session.  Today brought more positive news on inflation.  Import prices were down 1.4% in Jul.  The forecast expected a decrease of 1%.  Export prices also fell more than expected.  The preliminary Aug reading for the University of Michigan consumer sentiment index came in higher than expected & the report also showed one-year inflation expectations fall slightly.  However, 3-year inflation expectations ticked up.

10-year Treasury yield tick lower as investors assess economic data

The tax & spending bill looks like it will be approved.  That's something an economy suffering from high inflation does not need.  At the same time the inverted yield curve with a large spread between the yields on the 2 year & 10 Treasuries should be scary for investors.  That's a classic signal for a coming recession.

Dow Jones Industrials


Thursday, August 11, 2022

Markets fall while oil trades higher

Dow finished up 27 (but over 400 below its early gains), decliners over advancers 3-2 & NAZ slid back 74.  The MLP index was up 4+ to the 213s & the REIT index retreated 2+ to the 443s.  Junk bond funds continued strong & Treasuries had heavy selling raising the yield on the 10 year Treasury a big 11 basis points to 2.89%.  Oil rose 2+ to the 94s & gold was off 10 to 1803 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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Walt Disney (DIS), a Dow stock, reported that total Disney+ subscriptions rose to 152M during the fiscal Q3r, higher than the 147M forecast.  At the end of the fiscal Q3, Hulu had 46.2M subscribers & ESPN+ had 22.8M.  Combined, Hulu, ESPN+ & Disney+ have over 221M streaming subscribers.  Also, the company unveiled a new pricing structure that incorporates an advertising-supported Disney+ as part of an effort to make its streaming business profitable.  Starting Dec 8 in the US, Disney+ with commercials will be $7.99 per month — currently the price of Disney+ without ads.  The price of ad-free Disney+ will rise 38% to $10.99 — a $3 per month increase.  In addition, DIS lowered its 2024 forecast for Disney+ to 215-245M subscribers, down 15M on both the low end & high end of its previous guidance.  DIS had previously set its Disney+ guidance in Dec 2020 at 230-260M by the end of fiscal 2024.  The company reaffirmed its expectation that Disney+ will become profitable by the end of its fiscal 2024 year.  Overall, Disney posted better-than-expected earnings on both the top & bottom line, bolstered by increased spending at its domestic theme parks.  Fiscal Q3 EPS was$1.09 vs 96¢ expected & revenue rose to $21.5B from. $20.96B expected.  The stock went up 5.34 (5%).
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Disney (DIS) fiscal Q3 2022 earnings

Mortgage rates resumed their upward climb along with home prices.  Rates for a 30-year fixed mortgage rose to 5.22% from 4.99%, according to Freddie Mac's weekly data.  "Although rates continue to fluctuate, recent data suggest that the housing market is stabilizing as it transitions from the surge of activity during the pandemic to a more balanced market," said Sam Khater, Freddie Mac's chief economist.  "Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices likely will continue to rise, but at a slower pace for the rest of the summer."  Separately, the national median single-family existing-home price rose 14.2% annually to $413K, surpassing $400K for the first time, according to the National Association of Realtors (NAR).  80% of US metro markets saw double-digit annual price gains.  "Home prices have increased at a pace that far exceeds wage gains, especially for low- and middle-income workers," said NAR chief economist Lawrence Yun.

Mortgage rates spike as home prices hit new record

After fighting to repeal the $10K limit on the federal deduction for state & local taxes (SALT) a group of House Dems say they will still vote for the party’s spending package without SALT reform.  Reps. Josh Gottheimer; Mikie Sherrill & Tom Suozzi, members of the SALT Caucus who have vowed to oppose a bill without SALT relief, expressed support for the Inflation Reduction Act after it passed in the Senate.  Enacted thru the Reps' 2017 tax overhaul, the SALT cap has been a pain point for costly states like New York & New Jersey because residents can't deduct more than $10K in state & local taxes on their federal returns.  With a slim Dem majority, SALT reform was a sticking point during Build Back Better negotiations & the House passed an $80K SALT cap increase thru 2030 in its spending package.  However, the plan stalled in the Senate after pushback from Sen Joe Manchin.  While advocates say the SALT deduction limit hurts middle-class families, opponents contend removing the cap may primarily benefit wealthy homeowners.  If repealed completely, the top 20% of taxpayers may see more than 96% of the relief, according to a Tax Policy Center report, affecting only 9% of American households.  Without an extension from Congress, the $10K SALT limit will sunset by 2026 along with other provisions from the Tax Cuts & Jobs Act of 2017.

House prepares for reconciliation vote without SALT deduction relief

Gold futures finished lower, as a 3-week rally for the precious metal sputtered with investors shifting focus to a rising US stock market instead of on safe-haven plays like gold & the $.  Price action Gold futures expiring in Dec dropped $6 to settle at $1807 per ounce, the first down close for the most-active contract since Aug 5.  Gold's rebound over the past 3 weeks stalled today, after the precious metal climbed from a low of below $1680 per ounce for the most-active contract to an intraday high of $1824 per ounce yesterday.  The retreat came a day after US inflation data for Jul showed signs of a pullback in the pace of sharp consumer-price gains, pegged at a 8.5% annual pace from 9.1% in Jun, which was a 41-year high. In its wake, stocks rallied sharply, the $ retreated & gold edged lower.  In recent months, the yellow metal has typically traded inversely to the $ & Treasury yields, as expectations for rapidly higher interest rates helped dull gold's luster.

Gold retreats but holds above $1,800 as recent rally stall

Crude oil futures moved higher, finding support after the Intl Energy Agency (IEA) raised its forecast for global oil-demand growth as summer heatwaves in Europe & tight natural-gas supplies prompt more oil use for power generation.  Oil remained higher after OPEC cut its forecast for demand growth in 2022, citing worries over COVID restrictions & geopolitical tensions.  West Texas Intermediate crude for Sep rose $2.41 (2.6%) to finish at $94.34 a barrel.  Oct Brent, the global benchmark, gained $2.20 (2.3%) to settle at $99.60 a barrel.  The IEA said high prices & limited supplies of natural gas in Europe, after Russia cut energy exports to the region, have pushed power plants & heavy industries to look to oil as an alternative fuel source.  The IEA said the trend would result in additional oil-demand growth of 380K barrels a day in 2022, with the agency lifting its oil-demand growth forecast by that amount to 2.1M barrels a day.  OPEC, meanwhile, cut its estimate of 2022 demand growth to 3.1M barrels a day from a previous forecast of 3.4M barrels a day (mb/d).  OPEC described the outlook as still healthy, with total oil demand expected to average around 100 mb/d in 2022.  Oil ended a choppy session with gains yesterday, after the EIA said US crude inventories jumped 5M barrels last week.  The EU on Mon presented what it described as its final text for restoring the 2015 nuclear accord with Iran, signaling it was up to Tehran to take or leave it.  Iranian officials have said they delivered an initial response to the draft & would make further points at a later date.

Oil prices lifted as IEA boosts demand forecast

Stocks began the day trading higher, but sellers took command & it was downhill for the rest of the day.  The chart below shows Dow was heavily overbought   A correction was in order.  The inflation news today was underwhelming.  Oil has been in the 90s recently, below its highs over 120.  Now it's 94.  Forecasts vary on how strong economies will be for the rest of the year, but high inflation for food prices seems to be in order.  In addition, recession thoughts remain out there.

Dow Jones Industrials