Monday, October 16, 2017

Higher markets after Trump & McConnell discuss future legislation

Dow jumped up 85 (nearing 23K), decliners barely ahead advancers & NAZ gained 18.  The MLP index were off 2+ to 280 & the REIT index fell 1+ to the 356s.  Junk bond funds fluctuated & Treasuries were sold.  Oil climbed higher (more below) & gold dropped 8 to 1295.

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Senate Majority Leader Mitch McConnell says he & Pres Trump "have the same agenda" as they wrap up their meeting in the Oval Office.  McConnell is pushing back against the notion that he & Trump are at odds.  McConnell says, "we've been friends and acquaintances for a long time" & adds that they talk frequently on weekends.  The senator says he & the pres are working on the budget, a tax overhaul & a funding bill to address the recent spate of hurricanes.  McConnell adedd, "we're together totally on this agenda to move America forward."  Trump says he & McConnell are "closer than ever before."  Trump appeared with McConnel at an impromptu press conference at the White House.  Trump says McConnell has been a "friend of mine for a long time" & that they are "fighting for the same thing."  The pres says Reps are "close" on health care legislation & said they are working together on a tax overhaul.  Trump & McConnell came to the Rose Garden to talk to reporters after they had lunch together at the White House.

McConnell says he and Trump have 'same agenda'

Manufacturing activity in NY picked up this month, expanding at the fastest pace in 3 years.  The Federal Reserve Bank of NY says its Empire State manufacturing index jumped to 30.2, the highest level since 2014 (any reading above zero points to expansion).  Shipments of goods soared more than 11 points to 27.5, the NY Fed said.  New orders fell nearly 7 points to 18, a reading that still indicates demand is solid.  A measure of employment also rose, a sign that factories in the state are creating more jobs.  Nationwide, manufacturers are benefiting from a healthy global economy & a decline in the $'s value, which makes US goods cheaper overseas.  Automakers have also ramped up production to replace cars destroyed by recent hurricanes.

Manufacturing in New York accelerated in October: Survey

The Federal Reserve will probably need to raise interest rates in Dec & then 3 of 4 times "over the course of next year," assuming the US unemployment rate continues to fall & inflation rises, Boston Fed Pres Eric Rosengren said.  If inflation reaches the Fed's goal while the unemployment rate, now at a 16-year low of 4.2%, is below 4% that may be a signal that the economy could be overheating, Rosengren suggested.  To stabilize inflation at 2%, Rosengren said, "you might have to overshoot" by pushing rates higher than the level expected in a healthy economy.  In Sep, Fed officials estimated that neutral rate to be 2.8%.  The comments mark Rosengren, who does not vote on policy this year, as slightly more hawkish than most of his colleagues.  The Fed left rates unchanged last month, but signaled it would likely raise them again in Dec, & 3 more times next year.  Asked how he would feel if the next Fed chair wanted to enshrine a rule that suggests a faster pace of rate hikes into law, Rosengren sounded unbothered.  "My hope would be that they were flexible and pragmatic enough that if the rule wasn’t working particularly well that they would make adjustments," he said.

Fed's Rosengren sees three to four rate hikes next year

Oil prices jumped 1% as Iraqi forces entered the oil-rich city of Kirkuk, taking territory from Kurdish fighters & briefly cutting some crude output from OPEC's 2nd-largest producer.  Iraq's Kurdistan briefly shut down some 350K barrels per day (bpd) of production from major fields Bai Hassan & Avana due to security concerns.  Iraq launched the operation yewsterday as the crisis between Baghdad & the Kurdish Regional Gov (KRG) escalated.  The KRG voted for independence in a Sep 25 referendum.  West Texas Intermediate (WTI) crude was up 36¢ (0.7%) at $51.81 per barrel.   The gov said its troops had taken control of Iraq's North Oil & the fields quickly resumed production.  The KRG gov said oil continued to flow thru the export pipeline & it would take no steps to stop it.  Still, the action unsettled the market.  600K bpd of oil is produced in the region & Turkey has threatened to shut a KRG-operated pipeline that goes to the Turkish port of Ceyhan at Baghdad's request.

Oil jumps 1%; fighting shuts output in Iraq's Kirkuk

The luncheon meeting & follow up orchestrated press conference may have eased some nerves by traders.  At least the pres & McConnell made an effort to send the message that they are both working on getting bills thru Congress.  There is not much time, even if they work until Christmas, to get a ton of work done.  The Dow is just 44 away from reaching 23K.  It rose up to 20K last Dec.

Dow Jones Industrials

Markets crawl higher while waiting for earnings reports

Dow went up 25, advancers slightly ahead of decliners & NAZ gained 16.  The MLP index lost 1 to the 281s & the REIT index dipped to the 356s.  Junk bond funds inched higher & Treasuries slid back.  Oil was fractionally higher in the 51s & gold inched up 2 to 1306.

Dow Jones Industrials

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Federal Reserve Chair Janet Yellen said that the central bank expects to continue to raise interest rates gradually as solid growth, a strong labor market & a healthy global economy lift prices even as she recognized that inflation has been surprisingly low. “My best guess is that these soft readings will not persist, and with the ongoing   She said that the Fed expects to continue to raise interest rates gradually as solid growth, a strong labor market & a healthy global economy lift prices even as she recognized that inflation has been surprisingly low.  “My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year,” Yellen added   “The biggest surprise in the U.S. economy this year has been inflation,” Yellen continued.  While the Fed chair said she expects a pickup, she & her colleagues “recognize that this year’s low inflation could reflect something more persistent than is reflected in our baseline projections.”  Inflation came in at 1.3% in Aug after stripping out volatile food & fuel, well below the Fed's target.  It has been headed in the wrong direction for months & data through the end of the year will be unreliable, clouded by seasonal adjustment issues & price fluctuations wrought by hurricanes that hit the South late this summer.  Employment, meanwhile, has surpassed expectations.  The jobless rate has fallen to 4.2%, its lowest level since 2001 & the participation rate has shown stabilization as Americans come back into the workforce.  Wages have been slow to accelerate, but show early signs of life.  “On balance, wage gains appear moderate, and the pace seems broadly consistent with a tightening labor market once we account for the disappointing productivity growth in recent years,” Yellen said.  She added “risks to global growth have receded somewhat” & that she & her colleagues “expect growth to continue to improve over the near term.”  If strong growth & labor market tightness do push inflation higher, it would support the Fed's policy of gradual tightening thru interest-rate increases & a reversal of quantitative easing.  Officials project another increase in 2017 & market pricing indicates the move coming in Dec.  “We continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2 percent longer-run objective,” Yellen said.

Yellen Calls Inflation the 'Biggest Surprise' in the Economy

China's factory prices jumped more than estimated, as domestic demand remained resilient & the gov continued to reduce excess industrial capacity.  Consumer price gains matched projections.  The producer price index rose 6.9% in Sep from a year earlier, versus an estimated 6.4% in a recent survey & a 6.3% Aug reading. The manufacturing PPI sub-index climbed 7.3%, the most in 9 years.  The consumer price index climbed 1.6%, versus a prior reading of 1.8%.  Aggressive cuts to capacity in industries like steel & cement, coupled with resilient demand, have contributed to factory inflation that’s lasted longer than expected.  The drive to cut pollution & boost firms' efficiency will probably continue as the Communist Party begins its 19th Congress this week.  Producer prices for raw materials increased 11.9%, picking up from 11% in Aug & posting the biggest gain since Apr.  Core CPI increased to 2.3%, the fastest pace since 2011 & prices for consumer goods rose 0.7% while those for services added 3.3%

After laying out the Trump administration's most aggressive Nafta demands to date, chief US negotiator John Melle was asked how things are progressing.  “Fabulous,” he said, smiling & shrugging before entering a negotiating room once more.  The 4th round of negotiations is nearing an end amid rising tensions after the US presented proposls that could be politically unfeasible for Canada & Mexico.  US industry & Congress, meanwhile, are mounting a more vocal defense for preserving regional trade ties as they sense the discussions could be in trouble.  US negotiators in recent days put forth a string of bold proposals, on auto rules of origin, a sunset clause, gov procurement, & gutting dispute panels seen by the other nations as core to the pact.  The moves were long-signaled, as was Canadian & Mexican opposition to them.  The proposals have spurred public warnings from prominent US lawmakers & the private sector about the perils of scuttling a deal that over more than 2 decades has broken down trade barriers, including tariffs, for industries like manufacturing & agriculture.  Nafta’s fate may now hang on how flexible the US is about its demands heading into the 5th round of talks around the first week of Nov.  While the parties had wanted to reach a deal by Dec, officials familiar with the negotiations say the talks are likely to drag on for months.  Hanging over negotiations are Trump's regular threats to walk away.  One official familiar with the proceedings said that it seems more likely Trump will give the mandatory 6 months' notice required to leave Nafta, though not necessarily end up backing out. Others were less sure.  The 4th round of Nafta talks will continue today, before a ministerial-level meeting tomorrow.

Nafta Talks Left Reeling After Aggressive U.S. Proposals Land

Traders are back to twiddling their thumbs as they have to wait for earnings season to begin in full force.  In the the meantime, those guys in DC who will have a lot to do with the stock market rally, appear to be sliding back into a state of chaos.  The fate of tax reform, not to mention other items like funding the federal budget for the remainder of the fiscal year & raising the debt ceiling, look to be floundering.  Not good for stocks.

Dow Jones Industrials