Tuesday, November 5, 2013

Lower markets on services industry report

Dow fell 34, decliners over advancers 3-1 & NAZ was off 4.  The MLP index lost 4 taking it to the 453s & the REIT index was off 3 to the 278s.  Junk bond funds were weak & Treasuries sold off.  Oil fell to trade near the lowest price in more than 4 months amid speculation crude inventories increased for a 7th week in the US.  Gold held near the lowest price in more than 2 weeks, before a report on the US services industry that may provide clues on the timing of the reduction in stimulus by the Federal Reserve (FED).

AMJ (Alerian MLP Index tracking fund)

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CLZ13.NYM....Crude Oil Dec 13...94.08 Down ...0.54  (0.6%)

GCX13.CMX...Gold Nov 13.....1,306.90 Down ...7.70  (0.6%)

Service Industry Growth

Photo:   Bloomberg

Activity at US service firms accelerated in Oct despite the partial gov shutdown, boosted by a jump in sales & more hiring.  The Institute of Supply Management says its service-sector index rose to 55.4 in Oct, up from 54.4 in Sep.  The index hit an 8-year high of 58.6 in Aug.  Any reading above 50 indicates expansion.  A measure of sales fell jumped 4.6 points to 59.7 & a gauge of hiring rose 3.5 points to 56.2.  The report measures growth in service industries, which cover 90% of the workforce, including retail, construction, health care & financial services.  The pickup followed the group’s report last week that showed manufacturing grew at the fastest pace since Apr 2011, a sign purchasing managers were gaining confidence in the expansion.  The data indicate companies were looking beyond the political infighting that closed the gov in early Oct.

Service Industries in U.S. Grow at Faster Pace Than Forecast

Home for Sale

Photo:   Bloomberg

Home shoppers are getting another chance, thanks to Big Ben.  After 5 months of public speculation about when the FED would end its housing stimulus sent mortgage costs to a 2-year high in Sep, the FED last week pledged a continuation of the bond buying responsible for last year’s all-time low 3.36% for a 30-year fixed loan.  The 4-year economic expansion has been buttressed since early 2012 by a housing recovery that lifted construction & supported consumer spending.  That rally was helped by borrowing costs that fell to a record low in Dec.  Demand for properties began to weaken after Bernanke said in May that the FED could slow the pace of its bond purchases.  Speculation intensified in Jun & rates reacted with a surge that sent pending home sales tumbling 9% in the 4 months thru Sep to the lowest level of 2013 while home affordability fell to a 5-year low.  Homebuilders, among the biggest beneficiaries of monetary stimulus, have slumped more than 20% since a May peak.

Bernanke Giving Homebuyers Second Chance With Pledge: Mortgages

Premier Li Kiqiang said China needs 7.2% growth to keep unemployment stable & signaled reluctance to widen the budget deficit or ease monetary policy to ensure expansion.  Expansion at that pace would create 10M jobs a year to maintain the urban registered jobless rate at about 4%, Li said in an Oc 21 speech.  China’s growth has entered a stage of medium-to-high speed, meaning about 7.5% or above 7%, Li said. 
The comments, consistent with other gov statements, provide more context for targets in the coming years ahead of the Communist Party’s 4-day conclave starting Nov 9 that will consider reforms aimed at maintaining the pace of growth.  Leaders are entering the summit with the economy on an upswing, indexes of manufacturing and services in October show.  “Using the deficit and issuing money to stimulate investment can produce results that year, but corresponding operational room is needed to implement fiscal and monetary policies,” Li said.  “More importantly, this kind of short-term stimulus is hard to sustain.”  A Jul commentary from the official Xinhua News Agency said China needs growth of at least 7.2% to keep urban unemployment at about 5%, citing “authoritative” estimates.  Li told economists that 7% is the “bottom line” & the nation can’t allow growth below that.

Li Says China Needs 7.2% Expansion to Maintain Job Growth

Stocks are drifting lower with nothing particularly exciting going on.  The stocks are being sold following a strong services report that might give the FED an excuse to begin tapering it bond purchases.  This is not a good market when the main influence is the FED continuing its bond buying program to help keep interest rates low.  There is a business world out there.  Companies are supposed to generate higher sales which bring increased profits.  At least that's how the a stock market worked in the past.  Later this week, the ECB will make a decision about its low interest rate flat & then comes the delayed Oct jobs report.

Dow Jones Industrials

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