Friday, September 4, 2015

Lower markets as they weigh interest rate hike by the Fed

Dow dropped 272 (but off the lows), decliners over advancers 5-2 & NAZ fell 49.  The MLP index dropped 2 to the 351s & the REIT index was off 4+ to the 292s.  Junk bond funds were mixed to lower & Treasuries were bought as stocks were sold.  Oil saw selling again & gold was also weak.

AMJ (Alerian)  MLP Index tracking fund)








CLV15.NYM....Crude Oil Oct 15....46.54 Down ...0.21  (0.5%)

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Investors who woke up today expecting clarity on interest rates or the strength of the US economy got neither.  Stocks fell with emerging-market currencies & commodities after data showed the US economy added fewer jobs than expected even as wages & hours worked rose.  Declines in US shares deepened in PM trading, as anxiety remained elevated before a 3-day weekend, with financial markets unable to shake off volatility that’s jolted them since Aug.



Persistent hiring indicates employers were upbeat about America’s demand prospects amid mounting concerns of further deterioration in emerging economies.  At the same time, the report failed to convince that the American economy can underpin global growth amid increasing signs China’s weakness is spreading.

Asian Stocks Head for Seventh Weekly Drop Before U.S. Payrolls


German factory orders dropped a larger than expected 1.4% in Jul compared to the previous month, dragged down by flagging foreign demand.  The Federal Statistical Office reported that it revised the Jun 2% increase downward to a rise of 1.8%, adjusted for seasonal & calendar factors.  In Jul, domestic orders increased 4.1% but foreign orders decreased 5.2%.  New orders from the euro currency area were up 2.2%, but new orders from other countries dropped 9.5%.

German factory orders drop in July

The US trade deficit fell in Jul to its lowest level in 5 months as exports rose, signaling underlying strength in the economy amid concerns about a global growth slowdown.  The Commerce Dept said the trade gap narrowed 7.4% to $41.9B, the smallest since Feb.  The trade deficit in Jun was revised to $45.2B from the previously reported $43.8B.  The forecast was for the trade gap shrinking to $42.4B.  When adjusted for inflation, the deficit fell to $56.2B from $59.0B in the prior month.  The smaller deficit implied a modest contribution to GDP from trade early Q3.  Trade contributed 0.3 percentage point to the economy's 3.7% annualized growth rate in Q2.  In Jul, exports increased 0.4% to $188.5B.  While that was the first increase since Apr, exports remain constrained by a strong dollar.  The dollar has gained 16.8% against the currencies of the US main trading partners since Jun 2014.  There were increases in exports of food, industrial supplies & materials, & capital goods in Jul.  Automobile exports also rose.  Imports fell 1.1% to $230.4B.  However, automobile imports were the highest on record.  Imports of consumer goods fell in Jul.  Exports to China fell 1.9% & imports from that country dipped 0.2%.  That left the politically sensitive US-China trade deficit at $31.6B, up 0.4% from Jun.  Exports to Canada fell 8.3% & could come under more pressure after the Canadian economy slipped into recession in Q2.  Exports to recession-hit Brazil were the lowest since Feb 2010.  Exports to the EU fell 5.3%.

U.S. Trade Deficit Shrinks to Smallest in Five Months


The traders still at work are as confused as everybody else about the whether there will be an interest rate hike in 2 weeks.  It should not make a major difference, because it is coming & very likely soon.  Additional hikes will be phased in slowly.  Trading was unsettled today as stock positions were closed out ahead of a long weekend in a very unsettled world.  Dow is down more than 400 in Sep, not a good sign for the remainder of the month.

Dow Jones Industrials



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Markets decline as jobs report adds to interest rate debate

Dow sank 208, decliners over advancers more than 3-1 & NAZ dropped 27.  The MLP index was off 1+ to the 351s & the REIT index fell 3+ to the 393s.  Junk bond funds slid lower & money flowed into Treasuries.  Oil pulled back (see below) & gold remained weak.

AMJ (Alerian MLP Index tracking fund)


CLV15.NYM....Crude Oil Oct 15...46.16 Down ....0.59  (1.3%)

GCU15.CMX...Gold Sep 15......1,117.50 Down  ...6.20  (0.6%)






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Employers added just 173K workers in Aug & the jobless rate dropped to 5.1%, the lowest since Apr 2008 & a level that the Fed considers to be full employment.  The gain in payrolls, while less than forecast, followed advances in Jul & Jun that were stronger than previously reported, the Labor Dept said.  Average hourly earnings climbed more than forecast & workers put in a longer workweek.  Persistent hiring indicates employers were upbeat about America's demand prospects leading up to mounting concerns of further deterioration in emerging economies.  Job gains were helped by a jump at local govs, mainly in education.  While employment accelerated in health services & the leisure & hospitality sector, retailers & construction companies slowed the rate of hiring.  At the nation’s factories, payrolls slumped by 17K last month, the most since Jul 2013.  Producers of machinery, metals, food, plastics & rubber pared jobs, while automakers boosted employment.  Private payrolls, which excludes gov agencies, rose 140K, the smallest gain in 5 months.  The forecast called for a 217K increase in total payrolls.  Revisions to prior reports added a total of 44K jobs to overall payrolls in the previous 2 months.  Average hourly earnings increased 0.3% from the prior month & 2.2% over the past year.  The agency’s survey of households showed the participation rate, which indicates the share of working-age people in the labor force, held at 62.6%.  The average workweek for all employees increased to 34.6 hours, the longest in 6 months, from 34.5 hours.

Payrolls Rose 173,000 in August, Jobless Rate Drops to 5.1%

Federal Reserve Bank of Richmond pres Jeffrey Lacker said it's time for the central bank to end the era of record-low interest rates, now that the impacts from winter weather & energy prices have passed.  The Richmond Fed pres, who’s historically been more inclined toward tighter policy than most of his colleagues, said that labor-market slack has been reduced to pre-recession levels, & shorter-term inflation measures are tracking the US central bank's 2% target.  “I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring,” Lacker said.  “It’s time to align our monetary policy with the significant progress we have made.”  Lacker is a voting member of the FOMC this year & he has voted with the majority at every meeting so far, in contrast with his last term as an FOMC voter in 2012, when he dissented in favor of less stimulative policy.  US central bankers face their toughest policy call in years in Sep & have to decide whether to raise interest rates for the first time since 2006, or wait a little longer.  Lacker said he won’t make a final decision on whether to vote for a rate increase until he hears the discussion with his colleagues at the gathering on Sep 16-17.  “I have laid out my views here. I am always opening to listening to my colleagues in the meeting,” he said.  “I am going in with an open mind.”  Turbulence in global financial markets in recent weeks on signs of slowing growth in China has raised risks to the US outlook & caused Fed officials such as NY Fed pres William Dudley to question whether the time is right to raise the benchmark lending rate.  Lacker said that the “direct implications” of the recent market turmoil on US economic fundamentals look limited.  “We could see a fall in exports to China and it only makes a difference of a tenth or two in GDP growth. That is your first-round direct impact,” he told reporters.

Fed's Lacker Says It’s Time to End Era of Zero Interest Rates


Crude oil prices continued to trade lower Fri, after the weaker than expected Aug jobs report, when the US benchmark traded at $46.  Analysts said a strong number could boost the odds of an increase in interest rates this month, as well as indicating a long-term increase in demand for oil.  On Wed, West Texas Intermediate crude had fallen or risen by at least 6% for 4 straight trading days, the first time since Jan, 1991.  Despite the calmer trade, oil markets continue to get mixed signals from around the world.

Global Crude Prices Steepen Losses


What's there to say about an interest rate increase in 2 weeks?  Nobody really knows & that's the way it should be.  But the temporary emergency should be over after almost a decade & an increase is long overdue.  If there is one, it's logical to expect there will not be an increase at the next meeting (or 2).  Investors have to learn stock valuations are based on fundamental  business success, not hoping low interest rates will last forever.

Dow Jones Industrials