Tuesday, September 25, 2018

Markets waver ahead of the decision tomorrow

Dow fell 69, decliners ahead of advancers 4-3 & NAZ went up 14.  The MLP index lost 1+ to the 273s & the REIT index dipped 6 to 351.  Junk bond funds hardly budged in price & Treasuries were weak, bringing the yield on the 10 year Treasury up 2 basis points to 3.1%.  Oil crawled higher in the 72s & gold inched up 1 to 1206.

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Pres Trump called out members of OPEC for relying on US defense while hiking the price of oil, in an address to the UN General Assembly.  “OPEC and OPEC nations are, as usual, ripping off the rest of the world and I don’t like it, nobody should like it,” he said.  “We want them to stop raising prices … and they must contribute … to military protection.”  The sentiment echoed a tweet the pres sent out last week calling on “the monopoly” to lower prices ahead of a meeting of the 15-member oil cartel.  Oil prices hit a 4-year high today after the OPEC meeting over the weekend ended without an agreement to raise production, despite the US his calls to lower prices.  Meanwhile, OPEC's secretary-general warned that the global industry could “fall from one crisis to another” unless OPEC & non-OPEC countries cooperate.  Mohammed Barkindo added that global oil demand will increase by 14.5M barrels a day to a total of 111.7M barrels in 2040.  Trump maintained the US commitment to move ahead with sanctions on Iranian oil in Nov.  The pres also called out Germany directly for its reliance on Russian energy, saying unless it “immediately changes course” it will soon be completely reliant.  He maintained that the US was ready to export its oil, clean coal & natural gas, while it remains “committed” to maintaining its “independence from the encroachment of expansionist foreign powers.”

Trump: OPEC countries are ‘ripping off’ the rest of the world

Home prices are still rising, but the pace of the gains continues to slow, as potential homebuyers hit an affordability wall & sellers cave to the new reality.  Home prices rose 6% annually in Jul, down from the 6.2% gain in Jun, according to the S&P Corelogic Case-Shiller national index.  The 20-city index rose 5.9% annually, down from 6.4% in Jun.  The 10-city index rose 5.5% annually, down from 6.0% the previous month.  "Rising homes prices are beginning to catch up with housing," says David M. Blitzer, managing director & chairman of the index committee at S&P Dow Jones Indices.  "Sales of existing single family homes have dropped each month for the last six months and are now at the level of July 2016. Housing starts rose in August due to strong gains in multifamily construction. The index of housing affordability has worsened substantially since the start of the year."  Las Vegas, Seattle & San Francisco continue to see the biggest annual gains in home prices, with increases of 13.7%, 12.1% & 10.8% respectively.  5 of the 20 cities saw home price gains accelerate annually compared with Jun.  Since home prices last bottomed in 2012, following the epic housing crash, 12 of the 20 cities tracked by S&P Corelogic Case-Shiller have reached new highs, although those are not adjusted for inflation.  Those that are still lower were some of the cities that saw the greatest gains during the last housing boom, like Las Vegas, Miami, Phoenix & Tampa.  All those cities are still seeing strong price gains now, especially Las Vegas, which leads all the cities in gains.  While demand for housing is still strong, a continued shortage of for-sale listings has overheated prices throughout much of the past year & buyers stepped back.

Home prices rise at a slower rate in July: S&P Case-Shiller

Starbucks (SBUX) plans to lay off some corp employees & amp;institute leadership changes as part of an organizational shakeup, according to an internal memo from CEO Kevin Johnson.  “Starting next week and into mid-November there will be leadership shifts and non-retail partner impacts as we evolve the direction of teams across the organization in size, scope and goals,” Johnson wrote.  Johnson also said SBUX will make “some significant changes” to leadership roles & how functional groups are structured.  Job cuts will not include retail staff,. The corp restructuring comes as the company turns its focus to rapidly expanding in China & other global markets.  The coffee chain's sales growth in its home market has slowed & the company plans to close about 150 US stores next year.  SBUX has also undergone a transition at the top of the company.   Howard Schultz, credited for turning SBUX into a coffee giant, stepped down as exec chairman in Jun.  Former JC Penney (JCP) chief Myron E. Ullman was named chairman.  The stock gained 21¢.
If you would like to learn more about SBUX, click on this link:

Starbucks will make 'significant changes' to company, which includes layoffs

The markets were mixed until the PM when Dow (but not the NAZ) ran into selling.  Uncertainty about the trade wars & Fed statement tomorrow kept traders on edge today.  In addition, Trump made a tough speech at the UN which may have brought gloom to traders.  The Dow is still up more than 500 this month.  Not bad for a month that has been the toughest month of the year.

Dow Jones Industrials

Mixed markets after higher consumer confidence data

Dow lost 1, advancers  barely ahead of decliners & NAZ were off 9.  The MLP index fell 2+ to the 273s & the REIT index dropped 6 to 351.  Junk bond funds inched higher & Treasuries pulled back, bringing higher yields.  Oil rose in the 72s & gold added 2 to 1207.

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CL=FCrude Oil72.44

GC=FGold  1,206.50

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Stocks were little changed as the Federal Reserve's 2-day policy meeting kicked off.  The FOMC begins a 2-day meeting, investors widely expect policymakers to set in motion another increase to short-term interest rates.  Investors & economists will also be watching Fed Chairman Jerome Powell, whose comments tomorrow at a press conference, may offer a better picture of plans heading into 2019 & potential concerns over the economic impact of new import tariffs.  Stocks closed in negative territory ysterday after the White House said Pres Trump would meet Rod Rosenstein, deputy attorney general, on Thurs, dialing back earlier reports that an immediate firing was possible.  The Dow fell 181 (0.7%) to 26,562 & the S&P 500 dropped 10 (0.3%) to 2919.  The NAZ ticked 6 higher (0.1%) to 7993.  The Trump administration on placed tariffs of 10% on $200B  of Chinese products, with the tariffs set to go up to 25% by the end of 2018.  Beijing's new levies, which also went into effect yesterday, will be 5-10%.  China’s Shanghai Composite returned to trading following a holiday & traded down 0.8% & Hong Kong remained closed.  Japan's Nikkei ended the day up 0.3%.  In Europe, London’s FTSE gained 0.4%, Germany's DAX was 0.4% higher & France's CAC was up 0.4%.

Stocks little changed as investors await Fed decision

Consumer confidence rose in Sep, notching its highest level in 18 years.  The Consumer Board's index rose to 138.4 this month from 134.7 in Aug.  The forecast called for consumer confidence to dip to 132.  "Consumers' assessment of current conditions remains extremely favorable, bolstered by a strong economy and robust job growth," said said Lynn Franco, director of economic indicators at the Conference Board.  "These historically high confidence levels should continue to support healthy consumer spending, and should be welcome news for retailers as they begin gearing up for the holiday season."  Franco added the Sep index print is near the all-time high of 144.7 reached in 2000.  The survey measures Americans' sentiment on current economic conditions & prospects for the next six months, including business and labor market conditions.  The Conference Board also said optimism about the short-term outlook improved considerably this month, with 27.6% of consumers expecting business conditions to improve over the next 6 months; that's up from 24.4% in Aug.  Consumers expecting business conditions to worsen, meanwhile, dropped to 8% from 9.9%.  Labor-market expectations also improved in Sep as 22.5% of consumers expected more jobs in the months ahead, up from 21.5% in Aug.  This comes after the Labor Dept said Thurs initial weekly jobless claims fell to 201K, the lowest level in nearly 49 years.

Consumer confidence rises to highest level in 18 years

With oil bubbling higher, the UN provide the next catalyst for prices, with both Pres Trump & Iranian Pres Rouhani each speaking about US sanctions on Iran.  Trump & Rouhani appear separately at the UN General Assembly today, against the backdrop of already rising oil prices.  Rouhanie has no plans to meet with Trump.  He said conditions were not ripe for talks & said the US has made threats against his country.  Oil prices were higher with Brent crude just under $82 per barrel, a 4-year high.  Oil was boosted by supply concerns following a weekend meeting between OPEC ministers & Russia, where it was decided the current output agreement would remain unchanged for now.  The severe decline in Venezuelan oil output has exacerbated global supply, which could be made worse by the coming restrictions on Iranian crude.  The US pulled out of the Iran nuclear agreement, known as the Joint Comprehensive Plan of Action [JCPOA], between Iran & 6 countries that removed economic sanctions in return for Iran's promise to end its nuclear program.  However, the Trump administration opposed the agreement as one-sided & said it allowed for Iran to eventually resume its nuclear program.  The other parties in the agreement remain in it, along with Iran, but the US has already set plans to sanction Iran's oil business in early Nov.  Analysts say about 650K barrels of Iranian oil has already been taken off the market.  Even if European countries remain in the nuclear agreement, many companies will no longer deal with Iranian crude for fear of being kept from business dealings with the US.  Estimates of 1M barrels or more of Iranian crude could be off the market by year end.  The US has also objected to Iranian meddling in the conflicts in Syria & Yemen, in which it supports rebels that are hostile to Saudi Arabia.  The US has also charged that Iran supports terrorist organizations such as Hezbollah & Hamas.  A terrorism attack in Iran on Sun left more than 2 dozen dead & 70 injured. Iran blamed US allies in the region for the attack, which was carried out by militants dressed as soldiers at a military parade in Ahvaz.  A local Arab separatist group claimed responsibility.  Trump chairs the 15-member security council tomorrow & has said it will be about Iran, though it is expected to be broader.  The 4 other permanent members — China, France, Russia, Britain — plus Germany were parties to the Iranian nuclear agreement.

US, Iran clash comes to UN, helping push oil higher

Look out for 2 more rate hikes this year from the Fed to go along with economic growth nearing 3% & a central bank that eventually raises rates explicitly to slow growth.  A full 98% of the 46 respondents, who include economists, fund managers & strategists, see the Fed hiking rates a qtr point this week to a new range of 2-2¼% & 96% believe another qtr-point hike is coming in Dec.  Respondents see the funds rate rising by 2 more qtr points (50 basis points) in 2019, which would bring it to a range of 2.75-3%.  After that, divisions set in, with about ½ the group seeing a 3rd hike in 2019.  About 60% of the group see the Fed raising rates above neutral to slow the economy.  The average that respondents see the funds rate eventually ending this hiking cycle is 3.3%.  A 5th of the group say a "fed policy mistake" is one of the biggest threats facing the expansion, 2nd only to trade protectionism.  Respondents support Trump's handling of the economy by a 61% to 30% margin, unchanged from the Jul survey.  But 59% say his trade policies will reduce growth & 52% say they will lower employment in the US.  A slight 53% majority also say his negotiating tactics will lead to better trade agreements for the US, while 20% say they will be worse & 22% expect them not to change much.  Overall, the tariff effects on the economy are seen as modest.  Among those who see negative effects, the average is just a 0.2% decline for GDP in 2019 & a 0.2% higher inflation.  Forecasts suggest the pres has some room for his trade policies to subtract from growth without doing enormous economic damage.   Respondents look for GDP year over year to be up 2.8% in 2018, versus 2.2% in 2017 & up 3% in 2019, defying the general belief in a slowdown next year predicted by many economists.  Inflation is seen ticking up to around 2.5% this year & next, while the unemployment rate is forecast to fall to 3.7% by 2019.  "Rarely are so many economic gauges of the U.S. economy so strong — including employment, income, retail sales, business spending, manufacturing and small business," wrote Jack Kleinhenz, chief economist for the National Retail Federation.  "The near-term outlook appears to be steady as she goes."

Fed to hike rates two more times this year : CNBC Survey

After a wild day yesterday, excitement in DC has calmed down a bit, at least for the time being.  Economic data & confidence measures are all looking good while nagging thoughts about trade wars are on everybody's' minds.  The Fed announcement tomorrow should be a non-event after the rate hike has been advertised so well.  While the popular stock averages are all essentially at record levels, it is unusually difficult to make sense out of what is going on (especially in DC).

Dow Jones Industrials

Monday, September 24, 2018

Markets drop on trade worries and Rosenstein drama in DC

Dow pulled back 181 (finishing close to the lows), decliners over advancers 2-1 & NAZ added 6.  The MLP index fell 2+ to the 275s & the REIT index slid lower to 357.  Junk bond funds inched higher & Treasuries were off a tad.  Oil shot up 1+ to go over 72 as Brent hit a 4 year high (more below) & gold added 2 to 1203

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The US & China implemented another round of tariffs on B$ worth of one another's goods, which has the potential to raise US prices on some common consumer items.  The US targeted $200B worth of items from China, at a rate of 10%.  Beijing countered with tariffs on $60B worth of goods, at rates of 5-10%.  Among the US items expected to be hardest hit are printed circuit boards, desktop computers, computer parts & metal & wooden furniture.  In 2017, the US imported quantities of these items from China ranging from $3B (wooden furniture) to $11.6B (printed circuit boards).  Also expected to be impacted meaningfully are auto parts, including tires & brakes.  Vacuum cleaners, of which more than $1.8B worth were imported into the US last year, as well as light bulbs, could also take a hit.  On the other hand, certain technology items will be spared from the tax, including smartwatches, smart objects & Bluetooth devices.  That comes just weeks after tech giant Apple (AAPL), a Dow & tech stock, unveiled its new product line, which includes an updated smartwatch that has drummed up consumer interest.  The iPhone, iPad, iPod & Apple TV are included among the products that will not be affected by the tax.  As the Trump administration escalated the ongoing trade conflict, gov officials from Beijing accused the White House of engaging in “trade bullyism” to intimidate other countries into submission.  Last week, National Economic Director Larry Kudlow suggested the pres was using tariffs as a negotiating tactic, saying it was unclear how long the levies would remain in place.  The pair of powerhouse economies have already implemented tariffs on $50B worth of one another’s exports.

These products will now cost more due to the US-China trade war

The Federal Reserve is set this week to raise interest rates for a 3rd time this year to prevent the economy from growing too fast.  But with Pres Trump's trade fights posing a risk to the US economy, the Fed may soon be ready to slow its hikes.  Many analysts expect the economy to weaken next year, in part from the effects of the conflicts Trump has pursued with China, Canada, Europe & other trading partners.  The tariffs & counter-tariffs that have been imposed on imports & exports is having the effect of raising prices for key goods & supplies, potentially slowing growth.  An economic slowdown would likely lead the Fed to throttle back on its rate increases to avoid stifling growth.  In that scenario, it might raise rates only twice in 2019 & then retreat to the sidelines to see how the economy fares.  Compounding the effects of the tariffs & retaliatory tariffs resulting from Trump's trade war, other factors could slow growth next year. The benefits of tax cuts that took effect this year, along with increased gov spending, for example, are widely expected to fade.  Still, some analysts hold to a more optimistic scenario: That momentum already built up from the gov economic stimulus will keep strengthening the job market & lowering unemployment, at 3.9%, already near a 50-year low.  A tight employment market, in this scenario, will accelerate wages & inflation & prod the Fed to keep tightening credit to ensure that the economy doesn't overheat.  Any light the Fed might shed on those questions could come in the statement it will make after its latest policy meeting ends Wed, in updated economic & rate forecasts it will issue afterward.  The modest rate increase that's widely expected reflects the continued strength of the US economy, now in its 10th year of expansion, the 2nd-longest such stretch on record.  Most analysts also expect the Fed to signal that it plans to raise rates a 4th & final time this year, presumably in Dec.  The Fed's rate increases typically lead to higher rates on some consumer & business loans.  Should neither Powell nor the Fed itself clarify expectations for the months ahead, it could be because the policymakers are sharply divided & are coalescing into 2 familiar opposing groups — "hawks" & "doves."  Doves focus on the Fed's mandate to maximize employment & worry less about inflation.  Hawks tend to concern themselves more with the need to prevent high inflation.  One Fed board member, Lael Brainard, a leading dove, earlier this month surprised some with a speech that emphasized her belief in the need for continued gradual rate hikes.  This week's expected hike will be the Fed's 8th since 2015, when it began tightening credit after having kept its benchmark rate at a record low for 7 years beginning in 2008 at the height of the financial crisis.

Fed's 3rd hike this year expected despite rising trade risks

On the eve of the Federal Reserve's Sep meeting, Europe's top central banker delivered a sharp reminder to markets that the world's central banks are moving away from easy policies.  ECB Pres Mario Draghi said the "stable profile" of inflation "conceals a slowing contribution from the non-core components of the general index & a relatively vigorous pickup in underlying inflation."  Draghi's inflation comment was viewed as hawkish, even though he repeated that the ECB does not intend to raise interest rates through next summer.  The € rose, European stocks fell & European bond yields climbed, as traders took the comment to mean that inflation is stronger than expected, & that could mean rate hikes sooner.  US Treasury yields temporarily moved higher with European rates, as the German 10-year bund yield reached 0.50%.  ECB officials, Benoit Coeure & Peter Praet, said recently that the ECB will need to begin clarifying next year the likely path of interest rates, beyond the first hike.  Draghi's comments come as markets have begun to price in a more hawkish Fed.  Expectations in the futures market have only just recently priced in the 2 rate hikes forecast by the Fed for this year.  Nearly 2 are priced in for next year, while the Fed has forecast 3.

With Fed set to raise rates again, other central banks sound ready to end the easy money, too

Brent crude breached $81 a barrel, its highest level in nearly 4 years — on the back of a tightening oil market & OPEC leaders signaling they won't be immediately boosting output.  Global benchmark Brent crude rose as high as $81.39 a barrel, its strongest level since Nov 2014. The contract ended the session up $2.50 a barrel (3.2%) at $81.20, its best closing prices since Nov 11, 2014.  Meanwhile, US West Texas Intermediate crude rose $1.30 (1.8%) to $72.08, its best settle since Jul 10.  A meeting of OPEC & non-OPEC oil ministers in Algiers over the weekend concluded with the 15-nation cartel & its allies refraining from an urgent boost in output, despite Pres Trump's demands that it work harder to bring down prices.  The ministers said they would increase output only in the event that customers wanted more cargoes.  The Trump administration has been pressuring its allies to cut their Iranian oil imports down to zero since its decision to withdraw from the Iranian nuclear deal in May.  South Korea has dropped its imports to nearly zero, but Japan & Turkey have had little marked decrease in theirs.  India's imports from Iran in Aug were actually up 56% from the same month last year, due to large discounts offered by the Islamic Republic since the sanctions were announced.  A number of Asian countries, major customers of Tehran, have asked for waivers from the restrictions.  Iran's oil exports averaged 2.1M barrels per day (bpd) over the last year & analysts say sanctions will likely take 500K-1M bpd off the market.  A group of about a dozen oil producers led by OPEC has aimed to keep 1.8M barrels a day off the market since Jan 2017 in order to drain a global glut of oil that caused a punishing downturn.  In Jun, the participating countries agreed to restore some production after the group's output fell more than intended.  OPEC & Russia have pledged to increase production to meet any shortfall created by an anticipated fall in Iranian crude oil production, but no official decision has been made yet.

Brent crude breaks $80, its highest since 2014, as oil market tightens

If anything gets more attention than higher tariffs, it's the goings on in DC.  Chaos is in charge, with nobody really knowing what is going on.  The Dow pulled back from its record high on Fri, but tech stocks did well so that the NAZ was able to eke out a small gain.  This could be a wild week for stocks with the Fed meeting representing only a mild distraction.

Dow Jones Industrials